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Mergers and Acquisitions (M&LAS) are the vital growth stratèges ofcorparates in the scenario of
¿iobalizatkm. arú liberalisation to/ace competition and move ahead. M&A have grown not oriy
in volume hut also in value. It is often stated that the companies go for iruyrgank g;rowth strate^s
like M&A to improve performance. There is rw ckar-cut support from the literature about the effect
of M&A on corporate perforrTuiru:e. As per various studks, companies perform either better or
worse after M&As. But the question arises how long the effect of mergers and acquisitions remain
on the companks. The present study is an attempt to find out the time frame for knowing the effects
on perforrruince of manufacturing companks from M&A. The results suggest that the impact of
M&A on companks are refkcted in the immediate years specifkally the event year and the post
M &A one year.
INTRODUCTION
Mergers and Acquisitions (M&As) are considered as the important growth strategy-
for companies to satisfy the increasing demands of various stakeholders Krishnamurri
and Vishwanath (2010). Literature on theories of M&A shows that the motives of
companies behind going for M&A are gaining operating and financial synergy,
diversification, achieving economies of scale and scope leading to cost and profit
efficiency, acquiring mariagement skills, increase market power, get tax benefits,
(Weston et al, 2010; DePamphilis, 2010; Vijgen, 2007; Jensen, 1986; and Jayadev and
Sensarma, 2007).
A number of studies have been done in M&LA and post M&A firm performance
(George, 2007). Most of the studies are done using accounting measures (Kumar and
Rajib, 2Ö07); Pazarskis et al, 2006; Ooghe et al., 2006; and Vanitha and Selvam, 2007)
and event study (Aggàrwal arid Jaffe, 1996) methods to find out the shareholder
Lecturer, L M Thapar School of Management (LMTSOM), Thapar University, P O Box 32, Patiala, Pin 147004,
Punjab, India. E-mail: leepsa@thapar.edu, n.m.leepsa@gmail.com
Assitant Professor, Vinod Gupta School of Management, IIT Kharagpur, Kharagpur, India 721302,
**
E-mail: csmishra@vgsom.iitkgp.emet.in
SOUTH ASIAN JOURNAL OF MANAGEMENT
returns through M&A. The studies also focused on the economic and financial
condition of the companies in the post M&A period. But as far as litei-ature reviewed
there is insufficiejit evidence regarding the period for which the impact of M&A can
be seen (George, 2007). •- ' . ' ' ' ' •
The present study is an attempt to find out'the time frame for observing the
performance of companies after M&A. With the increase in the Volume, value and
fiequency of M&A deals in India, there is also a need for constructive and realistic
framework for analysis of company performance after they went for M&A transactions
(Krishnamurti and Vishwanath, 2010). Hence, the study has attempted to look into
the performance of M&A transactions in recent times. This study examines the
acquisition performance by exphcitly analyzing the mobile average returns' which are
ignored by many of the earlier studies in this M&A research. In a nutshell, this, paper
try to bring together two sets of literature with empirical evidence fiom Indian
manufacturing companies: orie examining'the post-acquisition performance; and the
second examining the timing of returns in the post-acquisition period.
' The mobile average generally is a trend line that smoothes the recurrences of the days and provides you with
a quick overview of the period trend. For example Formula for say 7 year would be : Yn = (Xn-3 + Xn-2 + Xn-
1 + Xn + Xn+1 + Xn+2 + Xn+3) /7 (Source: http://www.shinystat.cqm/erVglossary-detail_mobile-average.html)
Volume20 AQ No.3
DO MERGERS & ACQUISITIONS PAY OFF IMMEDIATELY?
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the acquiring firm. Vanitha and Selvam (2007) found that the quick ratio of the
target company remains as per the traditional benchmark ratio of 1:1. before and after
the merger period. There is a boost in the average net working capital after merger.
The reason behind the rise in the networking capital might be the accumulation of
the assets of the target company.
POST M&A SOLVENCY PERFORMANCE OF COMPANIES
Solvency refers to the ability and capability of a firm to meet its long term obligations
so as to achieve continuing expansion and growth. It is one of the key financial
parameters to judge the financial soundness of the firm. Pazarskis et al (2006) using
total debt ratio found that the solvency ratios in terms of net worth/total assets, and
total debt/net worth decreased slightly in values in post M&A period. Ooghe et al
(2006) found that in the inirial two years after the acquisition, there is progress in the
solvency position of the company. The authors also observed that from the second year
the financial independence and the cash flow coverage of debt reduces. The result is
inconsistent with the solvency posirion of the acquirer during the pre-acquisition
period. Thus, the acquirers depend more on debt during the post-acquisition period
in contrast to the pre-acquisition period. Kumar (2009) observed that post-merger
solvency position of the acquiring companies do not show any improvement when
compared with pre-merger solvency position.
POST M&A PROFITABILITY PERFORMANCE OF COMPANIES
Profitability refers to the ability of afirmto generate revenues after covering its expenses
or any types of cost involved in the business. Dickerson et al (1997) found that
acquisition gives no benefit compared to intemal growth in terms of profitability. There
is negative long-term effect on profitability of companies. Tambi (2005) using Return
on Capital Employed Ratio found merger bas not improved performance of companies.
Pazarskis et al (2006) found that ratios that evaluate the profitability decreased slightly
in the post-M&A period.
Kukalis (2007) found that the acquiring company outperformed the target company
in pre-merger performance only in the first and second year in terms of Return on
Assets (ROA), and only in first year in terms of Return on Sales (ROS) and Earnings
before Interest Tax Depreciation Amortisation (EBITDA). There are no statistically
different results between pre- and post-merger operating performance of the target
company. Interestingly, it is also found that the pre-merger performance of acquirer is
significantly better than the post-merger performance of the target company. However,
the results are not same in all years or in operating measures that are used.
Mantravadi and Reddy (2008) suggest that the influence of mergers on the
operational activities of companies is dissimilar across different industries in India.
Companies in the banking and finance industry enjoy positive rètums in terms of
profitability after merger. Performance, if evaluated in terms of profitability and retum
Volume20 A] No.3
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SOUTH ASIAN JOURNAL OF MANAGEMENT
Volume20 A? N a 3
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DO MERGERS & ACQUISITIONS PAY OFF IMMEDIATELY?
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From all the above studies, it is observed that, there is no convincing facts that
whether the inconsistency in the resultsfi:omM&A studies is because of the. different
timefir.ameused in the studies or the parameters they have chosen or the difference in
the country of acquirer, target. Specifically if these results are same in Indiaii context.
So, an attempt has beeri made to look at this knpvyledge gap in academic literature.
The research gapsfi:om,the literature are discusse.d below in detail: • ...
RESEARCH GAPS
As per the. past studies, companies either enhance their performance or make poor
performance after M&As. But the question still remains unexplored specially in Indian
context about the duration of the effect of M&As on the companies. There is limited
literature that shows about the timing of receiving the retums firom the M&A deals.
The present study is an attempt to find out the time firame for return of M&A from
M&A in case of value creation of manufacturing companiesfiromM&A.
Literature using different financial ratios has shown whether M&A improve
performance of companies or not. But a limited number of studies show during which
year the effect of M&A is reflected. Studies in the Indian manufacturing companies
are limited in the recent years where M&A have, gone up manifold. The present study
is an attempt to fill such research gaps in the area of corporate retums firom Indian
acquisition cases. •
Based on the research gap areas firom the literature survey the objective of the
study is as follows:
a. To analyze the liquidity, solvency, profitability performance of companies in
the mahufacturing sector before and after acquisition period.
b. To find out the time frame of value creation or to know in which year .
companies have M&A effect.
RESEARCH METHODOLOGY
HYPOTHESES -
Based oh the research objectives, the following research hypotheses are tested:
I H : There is no difference in the liquidity position in mcinufacturirig companies in
India before and after the first year, second year, third year of acquisition.
Voliine20 A l No.3 ..
43
SOUTH ASIAN JOURNAL OF MANAGEMENT
where, . .
s is the standard deviation of the sample and n is the sample size. ' ;
The degrees of fireedom used in this test is n-1.
Source: http://en.wikipedia.org/wiki/T_test.
All the financial performance parameters are adjusted for the industry average.
Industry average represents the performance of companies that have not gone through
M&A during the period under reference. ' '
SAMPLE DESCRIPTION
The sample belongs to companies in the manufacturing sector in ïndia. Acquisitions
of companies in Banking, Financial, insurance Services Industries (BFSI) aré excluded.
Financial performance, rneasures as mentioned earlier are not appropriate forfirnisin
the BFSI sector. The sample is further filtered so that three year pre- and a three year
post-acquisition data for both acquired and target companies are' continuously available.
The total number of sample firms has been taken based on ratios considering the
availability of data for each acquirer and target and for all continuous year. For example,
since some companies might not have debt, so for them debt ratio is not applicable.
Table 1 shows the sample of M&A companies as per different ratios of manufacturing
companies.' .. . . •- • •
Volume 20 A A N a 3
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DO MERGERS & ACQUISITIONS PAY OFF IMMEDIATELY?
EVIDENCE FROM MERGERS & ACQUISITIONS IN INDIA
- GR of the Manufacturing
! Companies. .
I - QR of the Manufacturing
" • Gomipániés."
•" - Net Working Gapital/Sales Ratio
z u- ;(NWGS) of the Manufacturing
'. ". " Companies. - .. . . '
• Paired-Sample t-test on Solvency
CO
ratibs. . <
¡r
- Total Debt Ratio (TDI|.) of the
Manufacturing Gompanies.
- Interest Coverage Ratio (IGR) of
the Manufacturing Gompanies
• Paired-Sample t-test on Profitability
Ratios. • !
o In the paired t test results, values are in the form are
t-values of paired samples where * means the
significance level is.0.1, ** means the significance
.level of 0.05, *** means the significance level of O.OI.
TO refers to acquisition event year; (T + 1) (T+2)
(T+3) refers to post acquisition first, second, third
year ; similarly (T-1) (T-2) (T-3) refers t o first,
second, third year prior to acqusition year;. •
Volume 20 45 No.3
SOUTH ASIAN JOURNAL OF MANAGEMENT.
Identificatian of Problem
Framing of Objectives
Objective 1 Objective 2
' Current Ratio: Current Return on Capital Total Debt Ratio: Total
Assets/Current Liabilities Employed (ROCE): Debt to Total Assets
Quick Ratio: Quick Assets/ EBIT/Capital Employed Interest Coverage Ratio:
Quick Liabilities Return on Net Worth EBIT/lnterest
Networking Capital/Sales:. (RONW): Profit after Tax
(Current Assets minus current /Net Worth
liabilities) by Sales
Volume 20
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DO MERGERS & ACQUISITIONS PAY OFF IMMEDIATELY?
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540
Os period (Average of TO, (T+1))
d
compared to a year ( T - l ) ,
(T-2), Average of ( T - l ) and
(T-2).
o Si
d
Os . Table 2 shows the paired t-test
S . " d
ies
Os
d is considered as acceptable limit. In
t
(O
the year following the acquisition,
en even if some companies faced
problem inefficiently utilizing the
a
984
042
Pu h^
(T-
Volume 20
47 N a 3
SOUTH ASIAN JOURNAL OF MANAGEMENT
I o CH"
(U +
After the acquisition liquidity has
improved.
QR is a suitable measure of
I performance; to access liquidity for
s r—
industries that engage in long product
u Os
r-) 5 production cycles, just as in
I
•i
+H oo
d manufacturing. The QR has improved
significantly in the post-acquisition
period (Average of T^, (T+1))
o
compared to a year (T-1),
•a (T-2), Average of (T-1) and (T-2).
2 It has declined compared to third year
.a prior to acquisition but the result is
a insignificant, t h e ' average QR in
event year was 1.66 comparatively
g better than one year prior to the
acquisition that was a QR of 1.64;
ri which increased to 1.90 in the first
+
H year after acquisition year and
gradually decreased to 1.84 and 1.79
in second and third year, respectively.
.
improved immediately after
0.844
0.862
-1.708
0.831
0.911
2b + i acquisitioh but in the long run it has
(A
1< °H ^ ^ educed. The significant results of the
ti QR came when compared with one
•tí
.« year prior acquisition with one year
1 lÈ +
,900
891
328
938
528
B
249
328
605
(T+1) and
Average of
issed Data
0.893
-1.298
0.882
0.936
0.908
0.631
1
0.822
rking
T+3)
H o O d d
co
improved the quick ratio which
means acquisition has helped the
•1 in ON r-i ON
companies in speeding the process of
o O
•u •
ON ON
"o -^
¿ obligations. EID-Parry (India) Ltd.
'S -^ and Ranbaxy Laboratories Ltd.
.s "« 00 . .- H
H H H re -—• performed well in terms of QR in pre-
Avei
(T-:
Ö 1 -T3
<^bg three years. But in the acquisition
Volume 20 No. 3
49
SOUTH ASIAN JOURNAL OF MANAGEMENT
,098^'
488,
382
Os
2'b + •*" T17 Zenotech Laboratories Ltd.,
r-i
1 1 1 1 respectively their pei-formance
deteriorated, but again in the event
*
hfl ^ ^ 0
*
Os
year in the post-acquisition three years
W h^ "1" 0 ro 00
S3 ^ H the combined firrn did well.
rJ rQ
1 1 1
1a 'S ' - * * *
#
In the average of acquisition year
and the subseiquent first year the
144,.014*
rage <
97**
(T+]
Oß iri
J ° °\ Î one year prior to the acquisition. In
tu:
1 1 1 ' ! •
ro
improved compared to one year prior
tí M '^ [^ + •*• (-^
2 ¿ ¿T H 00 VO Os to the acquisition. - • . '
s¿ b ^ 2^ 1 1 "7
(U Table 5 shows the paired t test
•B
VlM results on debt ratio of manufacturing
O »
companies.
.209*
«
atío
a
456
00
Os
1
' ^ acquisition which can show whether
the company will be solvent or
Tab
.679
064
,722
125
and
(T-
Volume 20
50 Na3
DO MERGERS &. ACQUISITIONS PAY OFF IMMEDIATELY?
EVIDENCE FROM MERGERS & ACQUISITIONS IN INDIA
k
ä+^ 30 S The increase of debt by acquirers to
U-;
E p
ra
> o T T T T finance the acquisition may put
a
S •^ H
pressure on the target firm
Uo " o ;:;• * * ^j
performance in post-MSiA first and
,g, u' + o * *
UT
',
NO
second year. But gradually when the
•C Î5 G-' oq o oq
3 't .—c
1 1 , 'T company pays off its debt the
u
42 < H acquisition can contribute positively
i ON ÚT
OO
to long-term.
rt + Î^ +
U-;
In comparison of pre- and post-two
ÖH + b 1 T T 1* years average, the debt burden of the
• 'o combined firms decreased for the
o
•tí O Q' deals done by Indoco Remedies Ltd.,
OO
O
S oo g
UT
ON UT r^ Seshasayee Paper & Boards Ltd.,
u (^ LH .-H Q
s« • ^ ' ^ ^ •,
1' 1 i • 1 . Ranbaxy Laboratories Ltd. Around
n
u
•1»
S
11 companies have shown ihcreased
debt burden after the acquisition.
ó UT
g. Î Nine companies have shown no
st on ]Interest
.—1
p p
b T
.—1
1 Í change in debt burden after the
acquisition. When compared wqth
one year before and after the
.882
-0, .768
,858
,097
NC
acquisition the debt burden of the
• ' b "? T ^ ; combined firm has increased in the
acquisition year as well as in the post-
acquisition year, for deals done with
UT
OO
*
O Table 6 shows the paired t test
'' O p. ON , ' • * •
p^
(U ir oc [-~
results on interest coverage ratio of
Tabl
, .—1
r manufacturing companies.
• - 1
The interest coverage ratio has
improved significantly in the post-
•' 2 - S '"o'TbC
' • ' •
.r , (U
Ctf) CQ oii"~I (-!< acquisition period. When the average
! and ('
[Avéra]
Avéra
. ! •
247
.233
J H
?
hefore acquisition. The ratio also
shows improvement in acquisition
IB year compared to first and second year
after acquisition. The firm's ability to
u 4» + Os
2b oq meet its payment of interest for deht
II o Ö
previously borrowed has. increased on
average in the post-acquisition second
tu
and third years compared to pre-
•5
365
SH + H
ratio has substantially increased for
the deal between Cadila Healthcare
'S Ltd. and Zydus Wellness Ltd. in post-
sîi acquisition first year then declined
Em]
062
043
146
977
TOT
2b + i coverage ratio than the target and
> «bb d
eight targets have a better ratio than
acquirer. Among them the interest
o
coverage ratio of five deals or the
^_
•<-i
tí n
CQ
O. ^ t^ + m
d Ö d d
combined firm has increased in the
1
6 acquisition year for those acquirer
c3 -< H
who had better performance than
*
target and six deals where the target
:.oio*
(T+;
L379*
:turii
.599
rage
.243
1.737
,407
in
1.04
(T+
p p companies.
1—1
b ^ ^
d i - H
,653
,686
1). (
T-1
T-2
rage
rage
(T-
Na3
Volume 2Ö
53
SOUTH ASIAN JOURNAL OF MANAGEMENT
The profitability of the companies has improved in the acquisition year and one
yeai: after the acquisition when compared to the pre-acquisition period. However,
there is significant improvement in the ratio when the post-acquisition period, i.e..
Average of T^, (T+1) as compared to (T-2), (T-3) years before acquisition. The
results suggest that the impact of M&A on companies are refiected in the immediate
years specifically the event year and the post M&A one.year. ••
LIMITATION OF STUDY
Like no other studies, this study has some inherent limitations. To begin with, the
study is limited to the period of study that has taken only three years pre- and post-
acquisition. Future studies can extend the number of years to five years to know the
impact on long-term period and M&A effects on a longer time frame. The study is
confined,to the manufacturing sector. There is ample scope for performance evaluation
in other sectors like service or financial sector. Since the study is conduced taking
into account M&A deals from different years and frorh different companies from
different industries, there might be variation in results if M&Afi:omdifferent industries
are studied separately. . , • '
because there may be some external factors that have influenced the perforinance of
companies. The present study made an attempt to find out up to which year after
M&À the results are significant and found that the impact of M&A is mostly reflected
in year of M&A event and one year post-M&A. Each and every acquisition is done
with different motives. Some deals may be done for short run benefits while some are
done for long run benefits. Generally companies acquire another firm for the long run
benefits like economies of scale keeping costs low. This indicates that even if the
cömpaiiies do not gain in a short period of time, thé acquisition will benefit in the long
run. This may riot be reflected in acquisition year or first year after acquisition. The
results of the present study confirm with Andre et al (2004) which found that mergers
perform poorly in the long run (three years). . .
The finding of the study has various implications for different users which are
discussed below:
MANAGERIAL IMPLICATIONS ^
As far as knowledge of literature is concerned, most of the studies have taken the pre-
and post-M&A period into consideration ignoring the M&A event year. But this year
would also have some effect since M&A would be perceived by investors as a chance
of increasing future values. In this study of effect of M&A event year is therefore
considered in apart from post M&A years. Another contribution of the study is that,
mobile average returns in M&A performance studies are studied by Xiao and Tan
(2007) and this paper deal with this matter and make a contribution to the academic
literature on ari area of the M&A methodology of the comparative small riumber of
studies that have examined the M&A iri a rising market like India.
ACADEMIC IMPLICATIONS '
Competition firom foreign firms, arrival of new technology, demanding attitude of
customers create an uncertain environment at the market place. Managers look for
strategies like M&A to cope with changing environments for survival and growth. In
such situation, the managers must be aware of the period in which they would gain
from strategies like M&A so that they wpuld.revise their strategies accordingly. Hence,
in this direction this research has greater managerial implication and contributes to
managerial practise in choosing between enhancing core competencies through internal
growth or through inorganic growth.
Acknowiedgment: The paper is presented at COSMAR, School of Management IISC
Bangalore. The variables used in the study are part of my research work at VGSOM, IIT
Kharagpuf Source: Leepsa and Mishra (2012b). ' - - -' ' '
REFERENCES
1. Agrawal A and Jaffe J F (1996, May), "The Pre-Acquisition Performance of Target
Firms: A Re-Examination of the .Inefficient Mariagement Hypothesis". Retrieved
fiom http://finance.wharton.upe'nn.'edu/--rlwctr/papers/9606.pdf -
• - Volume2Ö ^ ^ Na3
SOUTH ASIAN JOURNAL OF MANAGEMENT
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DO MERGERS & ACQUISITIONS PAY OFF IMMEDIATELY?
EVIDENCE FROM MERGERS & ACQUISITIONS IN INDIA
Volume 20 C7 N a 3
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ISBN: 978-967-5705-07-6. WEBSITE: w w w . i n t e r n a t i o n a l c o n f e r e n c e . c o m . m y
ABSTRACT
Mergers and acquisitions (M&A) are the corporate strategies that help in achieving various financial,
operational and revenue synergies that not only strengthen but also accelerate the growth of corporate
firms. Like many other Indian companies Crompton Greaves, an Avantha Group company, has adopted
M&A as a strategy and has possibly improved the corporate performance on all the fronts. In this case
study an attempt is made to analyze the M&A strategy of Crompton Greaves and post M&A
performance by applying different financial metrics.
Field of Research: Crompton Greaves, Merger, Acquisition, Synergies, Economic Value Added (EVA)
----------------------------------------------------------------------------------------------------------------------------------
1. INTRODUCTION
Mergers and Acquisitions (M&As) are the corporate strategy that helps in achieving various financial,
operational and revenue synergies that not only strengthen and but also accelerate the growth of
corporate firms. M&As are not new phenomena in Indian corporate world. From 2000 to 2011, there
have been 3692 merger deals, 9713 acquisition deals that are announced in India with the acquisition
consideration of more than Rs.10, 000 billion (Source: Business Beacon CMIE database).History of M&As
witnessed various drivers of M&A growth like economic boom period, technological developments,
development of railroads and transportation, government policy, pivotal role of investment banks,
globalisation, stock market boom and deregulation. During 1990s, economic liberalisation was initiated
in India and corporate faced competition from foreign companies. Crompton Greaves made its first
merger deal in 1990 with Kerala Electric Lamp Works Ltd and rest is history. Now Crompton Greaves is in
acquisition spree from 2005 with nine overseas deals in last six years to acquire technological
competence, expand product portfolio, and make international presence especially in Europe and US.
Acquisition has always been part of Crompton Greaves growth strategy story. Thus, it is though
2nd INTERNATIONAL CONFERENCE ON MANAGEMENT
237 (2nd ICM 2012) PROCEEDING
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ISBN: 978-967-5705-07-6. WEBSITE: w w w . i n t e r n a t i o n a l c o n f e r e n c e . c o m . m y
provoking to evaluate the M&A performance of Crompton Greaves with focus on motives, anticipated
synergies and how it has achieved success through M&A.
2. RESEARCH OBJECTIVES
Keeping in view the above background the present study has been conducted with the objective of
finding out various strategic motives, impact, role of human resources, challenges behind the M&A deals
by Crompton Greaves.
For attaining various objectives cited above, the analysis has been conducted in different phases. In first
phase information has been collected from various online sources, newspapers, and magazines to find
out the objectives with which Crompton greaves have gone for particular deals. In this phase
information has been collected to find out the deal structure (method of payment, deal value) of specific
M&A deals made by the sample company. In the second phase, accounting and financial data are
collected for the standalone and consolidated firms, ratios are calculated and pre and post acquisition
performance are evaluated. In this phase the emphasis is on to know the financial synergies of the
company and to evaluate the impact of M&A deals on profitability, liquidity solvency, Economic Value
Added (EVATM) of the company. To draw proper inferences with minimum biasness, these ratios are
compared with peer group companies that have not adopted M&A as growth strategy. The time period
for the study of financial performance is 2000-01 to 2010-11.
Incorporated in the year 1937, Crompton Greaves is engaged in designing, manufacturing and marketing
high technology electrical products and services related to power generation, transmission, distribution
and execution of turnkey projects. Crompton Greaves focus on three business groups, namely Power
Systems, Industrial Systems, and Consumer Products. The company manufactures a wide range of
products such as power & industrial transformers, HT circuit breakers, LT & HT motors, DC motors,
traction motors, alternators/ generators, railway signalling equipment, lighting products, fans, pumps
and public switching, transmission and access products. In addition the company also undertakes
turnkey projects from concept to commissioning. Its manufacturing plants are spread across Gujarat,
Maharashtra, Goa, Madhya Pradesh and Karnataka. Apart from the local markets Crompton Greaves has
spread business in the Southeast Asian and Latin American markets.
Crompton Greaves have made several M&A deals since 1990 till date. It has adopted inorganic growth
strategy for survival and success. The following table shows the various M&A deals done by Crompton
Greaves as an acquirer.
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238 (2nd ICM 2012) PROCEEDING
11th - 12th JUNE 2012. HOLIDAY VILLA BEACH RESORT & SPA, LANGKAWI KEDAH, MALAYSIA
ISBN: 978-967-5705-07-6. WEBSITE: w w w . i n t e r n a t i o n a l c o n f e r e n c e . c o m . m y
Deal Date Deal Type Target Company Swap Ratio/ Acquisition Value
Crompton greaves have made seven merger deals and eleven acquisition deals as acquirer. Out of it in
ten deals it made substantial acquisition and one minority acquisition.
The motives for going for any inorganic growth strategy have changed over the years as per the
requirement of Crompton greaves in different years and in different situations.
Pauwels Group (Belgium, o To expand business globally through access to Belgium, Ireland, Canada, the US
2005) and Indonesia where market penetration by a foreign entity is difficult; to
increase turnover by 75 per cent in 2006 to position the company amongst
world's top ten power transformer manufacturers
Power Technology o To gain significant consolidation in the engineering, procurement &
Solutions (UK, 2010) maintenance (EPM) segment in the UK and get access to newer markets and
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ISBN: 978-967-5705-07-6. WEBSITE: w w w . i n t e r n a t i o n a l c o n f e r e n c e . c o m . m y
• Acquisition has increased the company's brand value and is seen as a larger MNC.
• Acquisitions have helped the company to become more competitive and grab domestic and
export orders against stiff competition from global majors. M&A deals have increased core
competence in the power systems business and have brought more export earnings than any
other segment.
• Acquisitions have enabled the company to gain technological competence by collaborating with
its Irish and Hungarian counterparts on protocol development for relays and GIS development
respectively. Again with the acquisition of Emotron in 2011, Crompton Greaves is now able to
offer energy saving solutions with latest power electronics technology.
• Acquisitions have helped in expansion of product range through the target companies. For
example, during 2007-08, there were several new products / services offered by Pauwels such as
transformers filled with FR3 cooling liquid (natural ester); the prototype of a 5.5 MVA converter
transformer for RATP, the French metro; and the prototype of a 6.2 MVA bioSLIM transformer
for an off shore wind park.
There are various factors that influenced the path in M&A which are described below:
• Family owned and Group affiliated Business: Crompton Greaves is under Avantha Group whose
focus is on strategic acquisitions and financial structuring. Promoters Shares held is 41.69 per
cent and Non-promoters Shares held 58.06 per cent.
• Industry Relatedness: Crompton Greaves had made deals with the companies that belong to
same industry group namely generators, transformers & switchgears whose main product are
electricity energy products and electric motors. The related deals like those done with Avantha
Power & Infrastructure Ltd, Brook Crompton Greaves Ltd, Malanpur Captive Power Ltd.
• Acquisition Experience: Crompton Greaves have acquisition experience since 1990. The
acquisition experience helped the company to gain competence and expertise to evaluate the
right target firms and post acquisition integration plans.
• Size of Target Firms: Crompton Greaves have chosen target firms which are smaller in size than
it in the event year, event being M&A.
• People behind M&A: The team under the stewardship of Chairman and CEO of Avantha Group,
Mr. Gautam Thapar included Mr. B Hariharan, Mr. Manoj Malhotra and Mr. Laurent Demortier
among others had ability to manange firm and make right choice of deal.
The findings are discussed in light of revenue synergies, cost synergies and financial synergies as follows:
Economic Value Added (EVA)1 is claimed as a true measure of performance since it considers cost of
capital. The following table EVA and rate of EVA of Crompton Greaves over a period from 2000-01 to
2010-11. It also shows the average EVA rate of group of comparable companies.
_________________
1
EVA=PAT-(Rf + (Rf- Rm)*Company Beta))*Average net worth where Rf=7% and Rm=15%.
Rate of EVA=EVA/Average Net worth
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From 2004 onwards both EVA and rate of EVA have been positive for Crompton Greaves thereby adding
value for shareholders compared the industry counterparts. The rate of EVA is far superior for Crompton
Greaves over the similar companies that have not opted M&A. Improved EVA shows the M&A strategies
adopted by Crompton Greaves have boosted the operating efficiencies by combining product expertise
and market power or have proper management skills that have earned profit margin over and above the
cost of capital.
Table 4:
2008- 1.3 2.2 1.0 0.9 0.0 0.1 1.7 1.0 0.5 0.1 0.32 0.0 0.0 0.1 22.5 7.87
09 3 3 3 7 7 2 3 6 8 2 2
2009- 1.2 2.2 1.0 1.1 0.0 0.1 1.4 1.0 0.5 0.1 0.35 0.1 0.0 0.0 46.5 18.8
10 9 5 1 9 7 4 9 6 2 7 2 1 9 3 1
2010- 1.2 2.1 0.9 1.2 0.0 0.1 1.4 1.1 0.4 0.1 0.3 0.1 0 0.1 45.8 22.0
11 6 1 4 8 5 9 5 2 1 6 1 8
* CG: Crompton Greaves; CF: Control Firms
Table 4 shows that on average the current ratio, the quick ratio and networking capital ratio is lower
than the control firms. Crompton Greaves’ liquidity position is worse than those firms in same industry
who have adopted organic growth strategy. From 1994 to 2001, the ROCE of Crompton Greaves has
been lower relative to rival industries, but from 2002 till 2011, the company has been able to generate
higher returns compared to the firms who have not gone for any M&A deals. Similarly From 1992 to
2003, the RONW of Crompton Greaves has been poorer relative to comparable industries, but from
2004 to 2011, the company has been able to generate higher returns compared to control firms. It
indicates Crompton Greaves was able to control their target firms, made proper implementation and
integration thus experiencing superior returns. For 2005 and 2006 the Crompton greaves have higher
debt ratio as well as higher interest coverage ratio. But from 2008-2011, the Crompton greaves faced
favourable situation as the total debt ratio was higher for control firms but interest coverage ratio was
higher for Crompton Greaves. M&A create financial synergy. It is also found that Crompton Greaves had
improvements in operating cash flows from asset productivity compared to the median results for
control firms, specifically after 2002 when Crompton Greaves started adopting M&A due to loss making
phases in 2000-2001. Thus it is inferred that assets have been properly utilised by the company after
M&A to generate sales. This explains M&A increases assets productivity by eliminating facilities that are
unused.
Acquisition has made significant influence in Crompton Greaves performance in various ways. Keeping in
view various financial results it can be concluded that M&A improves performance which explains the
general hypothesis that successful M&A increases profitability which could be due to improvement in
efficiencies like cost reduction or enhanced market power or operating synergies. From the analysis
made it is found that M&A do not improve the liquidity position of firms since the companies that do
not went for any M&A deals have better liquidity position relative to Crompton Greaves. The solvency
position of the manufacturing companies improves after few years of M&As.
ACKNOWLEDGEMENT
This paper is a part of PhD program in Vinod Gupta School of Management, Indian Institute of Kharagpur
India.
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REFERENCES
Crompton buys Sonomatra for 1.3 mn Euros (2008), available from http://www.business-
standard.com/india/news/crompton-buys-sonomatra-for-13-mn-euros/38794/on accessed on
2nd April 2012
Crompton Greaves acquires Emotron for $82.2 Million (2011) available from
http://www.siliconindia.com/shownews/Crompton_Greaves_acquires_Emotron_for_822_Million
-nid-83761-cid-3.html accessed on 2nd April 2012
Crompton Greaves buys French firm Sonomatra for Euro 1.3 million (2008) available from
http://www.domain-
b.com/companies/companies_c/Crompton_Greaves/20080602_crompton_greaves.html accessed
on 2nd April 2012
Crompton Greaves buys US-based QEI for $30 mn, available from http://smartinvestor.in/pf/news-
74647-newsdet-Crompton_Greaves_buys_US_based_QEI_for_30_mn.htm accessed on 2nd April
2012
Sinha, V., & Mathew, J. (2005). Crompton Greaves acquires Pauwels available from
http://articles.economictimes.indiatimes.com/2005-02-25/news/27479170_1_crompton-greaves-
s-m-trehan-bm-thapar-group accessed on 2nd April 2012
Amity Management Review Copyright 2012 by ABS,
2012, Vol. 2, No. 2 Amity University Rajasthan (ISSN 2230 - 7230)
The purpose of the study is to analyse the financial performance of Steel Authority of India Ltd (SAIL) after merger deal with MEL. The
financial statements are analysed for pre and post merger five years (2000-2010) by using seven financial ratios. The accounting approach
uses accounting measures and productivity measures of financial statements to evaluate the M&A success. In spite of creation
limitations, accounting ratios are considered as reliable and convenient for making analysis since financial statements are audited. Ratio
analysis is employed as is considered as a convenient technique to make a quantitative analysis of companies' performance. The results
show that the financial performance of SAIL in terms of profitability, liquidity and solvency has improved after merger. It indicates that
merger deals improve the financial performance of companies. The limitation of the study is that it only focused on the financial aspect of
merger but ignores which factor have impacted the deal's success and failure. Study can be made by controlling factors affecting steel
industries. It would enable the organizations to have a choice between organic and inorganic growth strategy. Case based research on
pre and post merger on steel companies is made which is few as far as knowledge is concerned. This paper is an attempt to look into a
specific deal by which it would make deep understanding of merger performance in India.
Keywords: SAIL, MEL, Merger, Acquisition, Financial Performance
70
located in Maharastra. SAIL is a government owned Research and Development Centre for Iron and
company and is controlled by the Government of Steel (RDCIS) at Ranchi with all required facilities.
India. Around 86 per cent shares of SAIL is held by The sole motive behind the centre is to investigate
Government of India (Source: CMIE prowess how to produce qualitative steel and to build up
database). new technologies that would aid the steel industry
in producing better quality steel.
SAIL produces ample varieties of long and flat
steel products. These products get huge orders from The important divisions of SAIl are located in
consumers both in Indian as well as international various parts of the country. For example, Bhilai
market. SAIL has also good distribution network Steel Plant (BSP) that is located in Chhattisgarh,
system. It has around thirty seven 'branch sales Durgapur Steel Plant (DSP) situated in West Bengal,
offices' which are located in around four regions of Rourkela Steel Plant (RSP) placed in Orissa, Bokaro
the country. Apart from it, it has the pride of having Steel Plant (BSL) located in Jharkhand and IISCO
twenty five departmental warehouses, forty two Steel Plant (ISP) situated in West Bengal. Apart from
consignment agents and twenty seven customer these are the integrated steel plants, there are also
care offices. Not only SAIl has a strong distribution some special steel plants like Alloy Steels Plants
network but also a strong marketing division. This (ASP) in West Bengal, Salem Steel Plant (SSP) in
marketing division of SAIl has more than 2000 Tamil Nadu, Visvesvaraya Iron and Steel Plant
dealers which works to supply qualitative steel (VISL) in Karnataka (Source: CMIE prowess
across all parts of the country. SAIL also posses a database).
71
Maharashtra Elektrosmelt Limited (MEL) returns in spite of increase in the cost of power and
no supply of qualitative manganese ore. Again the
Maharashtra Elektrosmelt Limited was company managed to obtain technical know-how
incorporated on 17th April, 1974. The company is and engineering package from Uddeholm in 1986
located in Maharashtra. The central aim of MEL is to (Source: CMIE prowess database). ..
carry out manufacturing activities for producing
mild steel, other carbon or spring steel billets/ingots SAIL took over MEL as on 1st January 1986. Ltd.
that are derived from iron ore (Source: CMIE MEL became the the subsidiary of SAIL on on 18th
prowess database). October 1986. MEL transferred 82 per cent of its
shares to SAIL. The company went for
If the history of MEL is looked inside, then it diversification resulting in improvement in the
would be found that the company has entered many performance of the company. The company
agreements to continuously improve its technology expanded into value added products like medium
base and improve its production capacity. The carbon ferro manganese apart from improving its
company have made deal with Elkem-Spigerverket existing products. As on 31st March 1992, SAIL
a/s (ELKEM) of Norway in 1974. It was a technical owns 47, 87,935 number of equity shares of MEL. In
collaboration agreement for supplying know-how 1996, 50, 00,000 number of equity shares issued to
that would used for the smelting furnace and also to SAIL (Source: CMIE prowess database).
supply a range of patented designs and process. For
the purpose, around 24, 50,000 shares were taken up Merger Background
by the promoters and 1, 00,000 shares were kept to
The merger deal between SAIL and MEL was
give to the Development Corporation of Vidarbha
announced on 29th October 2005 with a swap ratio
Ltd. (DCVL). Then during August 1975 public were
of 1:1.7. The deal between mergers of MEL with
offered around 24, 50,000 shares at par. In the
SAIL was completed on June 14, 2011 with the
year 1985, MEL made another contract with
receipt of final order from the Ministry of Corporate
M/s. Uddeholm, a Sweden based company. The
Affairs. The following table shows the event dates of
collaboration was made for launching new
the merger event. It has been renamed as
technology in the converter that is required in the
Chandrapur Ferro Alloys Plant. Maharashtra
process of making steel. A year later during 1986, the
Elektrosmelt Limited (MEL) is a 99.12 per cent
company saw its production and turnover were
subsidiary of SAIL.
higher at 41,470 tonnes. It managed to get good
Table 4 Event dates of the merger event between SAIL and MEL
Event Date Event Name
29th October 2005 First media announcement
18th May 2006 Cabinet Clearance
25th May 2006 Acquirer Company Board meeting
15th April 2010 Merger Date w.e.f
10th June 2011 Government Clearance
13th July 2011 Deal Completed
30th September 2011 Date of Allotment
72
The merger benefits are discussed in following considered as event year as the impact of merger
points: starts from the date of the announcement of the
merger.
• The merger of MEL with SAIL is anticipated to
support the growth and expansion of MEL and Source of Data
also related investments which are linked with
various requirements of SAIL in relation to The database, Centre for monitoring Indian
ferro-alloy. Economy (CMIE) Prowess is used to collect the
secondary data of the two companies that includes
• SAIL is also looking for different opportunities the financial statements like profit and loss account
so as to establish a captive power plant with items, Balance sheet items, cash flow statement
appropriate capacity by making a joint venture items.
agreement with MEL. The plant would be based
on the location within the MEL plant area. The Tool and Technique
purpose for setting up such plant is to produce
cost-effective ferro-alloys. Ratios are used as to evaluate the current and
potential companies' performance to know whether
Research Methodology companies are profitable or not than the
competitors, the company efficiently uses its assets,
The research is carried out by following ways: enough cash and liquidity assets to meet its current
liabilities, it is generating an accepted rate of the
Research Objective return for shareholders, it has the ability to pay long
The aim of the study is to find out whether the term debt. Thus, ratio analysis is used after data are
merger of manufacturing companies improves the collected from the financial statements. For this
performance or not. Thus the following objectives purpose, profitability ratios, liquidity ratios,
are framed in the study: solvency ratios have been chosen to evaluate the
performance since they are considered as the most
• To evaluate out the liquidity position of SAIL,
reliable and efficient ratios to check performance of
MEL and the combined firm in the post merger
companies. Since real effects of the merger are seen
period
in the long term period when companies have
• To find out the profitability position of SAIL, enough time for integration and implementation of
MEL and the combined firm in the post merger merger, so five year average of the pre and post
period merger year has been taken for data analysis.
• To access the solvency position of SAIL, MEL
and the combined firm in the post merger
Results and Discussions
period With the help of financial data available in the
audited statements of SAIL and MEL, financial
• To observe the operating efficiency of SAIL,
ratios are calculated from 31st March 2000 to 31st
MEL and the combined firm in the post merger
March 2010.
period
Hypothesis
Chart 1 Pre and Post Merger Current Ratio
Based on the review of literature made and in order
Current Ratio
to fulfil the main objective of the study, following 2.50
hypothesis has been formulated: 2.18
1.95
Ho: Post merger performance improves after the 2.00
1.78
1.88
merger
1.50 1.39
1.34
Ha: Post merger performance does not after the 1.24
1.13
merger 0.97
0.92
1.00 0.85
Sample
0.50
SAIL is chosen as the sample for this study.
0.00
Sample Period 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Current Ratio
The sample period is from 2000 to 2010. 2005 is
73
The combined firm's performance has quick ratio of the company but after that there has
improved in terms of the current ratio. There is a rise been an increase in the quick ratio. A quick ratio of
in the current ratio of the company after 2005 1:1 is the standard norm for evaluating the accuracy
indicating that the merger has increased the of the information pertaining to going concern
liquidity of company by improving the ability of the solvency of a business. In post merger period, the
company to meet its maturing obligations. More company is able to maintain the norm which was
liquid assets might be kept intentionally to use the below one in pre merger case. The quick ratio is even
liquid funds for expansion purpose. As per the plans more than the standard norm 1:1 may be because the
of SAIL, it plans to invest around Rs.1500 crore in company plans expansion of business that might
expanding capacity and putting up a power plant. require more of quick assets.
There is a chance of building up a captive power
plant (investing around Rs 1200 crore) with the help The net working capital by sales ratio has
of joint venture inside the MEL so as to cost-effective improved in the post merger period compared to the
ferro-alloys. pre merger year. There is a steady rise in the net
working capital/sales ratio (NWCS) during the five
The post merger quick ratio has improved years after the merger took place. It indicates that
compared to the pre merger period. Even though in the degree of efficiency in the use of short term funds
the first year after the merger there was a fall in the has improved to generate higher sales.
Quick Ratio
1.80
1.65
1.60
1.37 1.37
1.40
1.19
1.20
1.00
0.86 0.83
0.80
0.20
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Quick Ratio
Chart 3 Pre and Post Merger Net Working Capital by Sales Ratio
0.40 0.36
0.30 0.28
0.23
0.20 0.15
0.11
0.10
0.00 -0.04
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-0.09 -0.09 -0.08
-0.10
-0.19
-0.20
-0.30
Net Working Capital By sales
74
Chart 4 Pre and Post Merger Return on Capital Employed Ratio
0.60
0.37
0.40
Chart 5 Chart 4 Pre and Post Merger Return on Net worth Ratio
0.60 0.54
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-0.18 -0.15
-0.20
-0.36
-0.40
-0.60
-0.80 -0.77
-1.00
Return on Net Worth
The company has been utilising the affected in 2008-2009 due to financial crisis
shareholders fund to the optimum level in the event worldwide. But if is compared with pre and post
year of merger but in the post merger years it has first and second year, then in the post merger period
failed to deliver good returns. In the second year the RONW has been better than the pre merger
after the merger the return on capital employed period.
increased compared to the pre merger second year,
but then the return has decreased in the five years in The combined firm's financial leverage was low
post merger year. up to three years in the post merger year, but it has
increased in the fourth and fifth year after the
The return on net worth improved in the merger merger. The reason may be that other factors have
year but declined in the post merger first year and influenced the company's debt position. Low debt
improved in the post merger second year, but equity ratio indicates that SAIL has repaid its debt
afterwards it has declined in 3rd, fourth and fifth over the years and is in a very good position to
year. The declining performance might have been borrow funds or debt for its future expansion plans.
75
Chart 6 Pre and Post Merger Total Debt Ratio
0.59
0.60 0.57
0.55 0.56
0.50
0.40 0.38
0.30
0.24
0.19
0.20
0.14 0.14
0.12
0.10 0.07
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total Debt Ratio
49.68
50.00
40.00 38.91
31.08
30.00 27.53
20.00 16.59
14.35
10.00
3.86
0.02 0.59 -0.08 0.77
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10.00
Interest Coverage Ratio
1.00
0.88
0.84
0.80
0.64 0.66
0.62 0.64
0.60
0.40
0.20
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Asset turnover Ratio
76
post merger first year the interest coverage ratio synergistic effects of merger and then in the second
has declined, even though it has been better than the year the profit margin was lower due to both
pre merger first year. The company's ability to pay companies took time for adjusting to the merger, but
its debt has declined may be because it has been in afterwards the company's profit margin was higher
the initial year of merger which needs time for thus with higher asset turnover ratio.
integrating activities and improving performance to
pay back the debt. However in the second and third The following table depicts the pre and post
year the company was able to meet its financial merger company performance with explanations
charges by paying off the interest or fixed expenses. below it:
As the total debt ratio has increased in the fourth and Stage1: Without Industry adjusted Returns (or Without
fifth year, the interest coverage ratio has decreased Control/Comparable Firms)
in the same years.
The comparison of pre and post merger
As it is known that the asset turnover ratio liquidity performance ratios for the acquirer, target,
exhibits the relationship between the revenue and the combined firm showed that there is an
earned and the total assets of the company, a higher increase in the current ratio, quick ratio and net
asset turnover ratio indicates that the company's working capital ratio in the post merger period. The
total asset has been properly utilised to generate post merger profitability improved in both ROCE
sales or earn revenues. The asset turnover ratio and RONW positively. The debt reduced while the
decreased in the first year after the merger and then debt paying capacity increased which is reflected in
it has increased and after three years again it has a decrease in total debt ratio and increase in interest
decreased. It means that the company's profit coverage ratio. The turnover also increased in
margin improved in the initial year with the average in a post merger year.
Table 5 Five Year Average Pre and Post Merger Financial Performance
Financial Ratios Steel Authority Maharashtra Combined Firm Industry Difference
of India Ltd Elektrosmelt Ltd Median
Pre Current Ratio 1.03 0.64 1.02 2.08 -1.06
Post Current Ratio 1.84 1.34 1.84 2.35 -0.52
Difference 0.81 0.70 0.82 0.27 0.55
Pre Quick Ratio 0.47 0.25 0.46 1.21 -0.75
Post Quick Ratio 1.29 0.69 1.28 1.29 -0.005
Difference 0.82 0.44 0.82 0.08 0.74
Pre Net Working Capital/Sales -0.10 -0.19 -0.10 0.07 -0.17
Post Networking Capital/Sales 0.30 0.10 0.30 0.09 0.20
Difference 0.39 0.29 0.39 0.02 0.35
Pre Return on Capital Employed 0.08 -0.57 0.08 0.06 0.02
Post Return on Capital Employed 0.35 0.51 0.35 0.11 0.24
Difference 0.27 1.07 0.27 0.05 0.22
Pre Return on Net Worth -0.18 -107.14 -0.19 0.06 -0.25
Post Return on Net Worth 0.29 0.33 0.29 0.10 0.19
Difference 0.47 107.48 0.47 0.04 0.43
Pre Total Debt Ratio 0.53 0.38 0.53 0.36 0.17
Post Total Debt Ratio 0.14 0.01 0.14 0.35 -0.21
Difference -0.39 -0.37 -0.39 -0.01 -0.04
Pre Interest Coverage Ratio 1.04 0.04 1.03 1.65 -0.61
Post Interest Coverage Ratio 32.14 2391.18 32.31 2.19 30.12
Difference 31.11 2391.15 31.28 0.54 30.74
Pre Asset Turnover Ratio 0.76 2.04 0.76 1.24 -0.48
Post Asset Turnover Ratio 0.95 1.70 0.95 1.36 -0.40
Difference 0.19 -0.33 0.19 0.12 0.05
77
Stage2: With Industry adjusted Returns (or With that influence the performance of steel companies
Control/Comparable Firms) like global recession, availability of finance, cost
The combined performed better than the structure, level of competition-concentration in
industry in terms of liquidity. This indicates the different geographies, market position-market
firms who have not used merger strategy have not share and the customer profile, product mix-
done well in terms of three ratios used for liquidity. commodity and value added products, production
On average, the acquirer have performed well in cycle, rising energy cost, supply and demand,
terms of profitability compared to those in industry supply of raw materials, technology-cost
who have not gone for any M&A deals. The merger cutting/competitive, investment in R&D-
has led to financial synergy which is reflected in the innovations, and labour productivity.
increase in debt ratio and increase in the interest
coverage ratio, an average of five years in pre and References
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Mel Merged With Sail, http://indscan.in/mel-merged-with-
sail/
Limitations Maharashtra Elektrosmelt Ltd amalgamated with SAIL , 18 July
There are certain limitations of this study. The 2011 , r e t r i e v e d o n 2 2 D e c e m b e r 2 0 1 1 f r o m
http://www.domainb.com/companies/companies_s/Ste
main limitation of this study is the lack of financial el_Authority/20110718_expansion_plans.html
data. Another drawback of the study is that it only MEL merges with SAIL, 18 July 2011 retrieved on 22 December
focused on the financial aspect of merger but 2011 from http://www.sail.co.in / showpressrelease.
ignores which factor have impacted the deal's php?id=264
success and failure. There might be certain inherent Maharashtra Elektrosmelt merges with SAIL, Tuesday, 19 Jul
2011, retrieved on 22 December 2011 from
limitations of accounting approach.
http://leeuniversal.blogspot.com/2011/07/maharashtra-
elektrosmelt-merges-with.html
Future Scope of Study Maharashtra Elektrosmelt Ltd, retrieved on 29th August 2012
from http://www.moneycontrol.com/company-
Future research in such area can be made to
facts/maharashtraelektrosmeltltd/history/MEL01
understand the impact of merger and acquisition by Scheme of Amalgamation, retrieved on 22 December 2011 from
taking M&A deal done in other sector like banking http://www.sail.co.in/MELper cent20Mergerper
and financial institutions. The same work can be cent20Scheme.pdf
extended by taking into account the industry Agenda for 100 days retrieved on 22 December 2011 from
average returns based on all steel companies and http://steel.nic.in/Agendaper cent20forper cent20100per
cent20days.pdf
then comparing the performance. It means the
Delisted Companies, retrieved on 22 December 2011 from,
performance of steel companies who have gone for http://www.bseindia.com/about/datal/delist/a-
the M&A deal (inorganic strategy) and who have delist.asp?alpha=M
not gone for the M&A deal (organic strategy). The Investorwords.com. (n.d.). Retrieved April 15, 2012, from
study can be extended by taking into consideration Investorwords.com: http://www.investorwords.com /
3045/merger.html
various factors other than mergers and acquisitions
78
Table: Pre and Post Merger Performance of SAIL
Post RONW
Post ROCE
Pre RONW
Pre ROCE
Means
Mean 0.90 1.67 0.39 1.09 -0.13 0.23 -0.14 0.40 -35.84 0.30 0.48 0.10 0.70 818.55 1.19 1.20
Variance 0.05 0.08 0.02 0.12 0.00 0.01 0.14 0.01 3813.43 0.00 0.01 0.01 0.33 1854 0.54 0.19
893.38
Observations 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Pearson
Correlation 1 1 1 -1 -1 1 -1 1
Hypothesised
Mean Difference 0 0 0 0 0 0 0 0
df 2 2 2 2 2 2 2 2
t Stat -20.03 -5.46 -10.06 -2.03 -1.01 66.24 -1.04 -0.09
P(T<=t) one-tail 0.00 0.02 0.00 0.09 0.21 0.00 0.20 0.47
t Critical one-tail 2.92 2.92 2.92 2.92 2.92 2.92 2.92 2.92
P(T<=t) two-tail 0.00 0.03 0.01 0.18 0.42 0.00 0.41 0.94
t Critical two-tail 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30
i - Acknowledgement - The variable definitions are taken from my Phd thesis (on going research work at VGSOM IIT Kharagpur) entitled
“Post Merger and Acquisition Performance: A Study with Reference to Manufacturing Companies in India.
79
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Find this Journal Online at
www.asiapacific.edu/far
Asia-Pacific
Finance and
Accounting Review
• The Impact of Rights Issue on Stock Returns in India
Akshita Agarwal , Prof. Pitabas Mohanty
Published by
Asia-Pacific Institute of Management
3 & 4 Institutional Area, Jasola, New Delhi-110 025
Asia-Pacific Finance and
Accounting Review
Volume I Number-1 October-December 2012 ISSN : 2278-1838
Contents
• The Impact of Rights Issue on Stock Returns in India Akshita Agarwal and Prof. Pitabas Mohanty 5 - 16
• Post Acquisition Performance of Indian Manufacturing N.M. Leepsa and Dr. Chandra Sekhar Misra 17 - 33
Companies: An Empirical Analysis
• Inter Linkages of Indian Stock Market with Dr. Vanita Tripathi and Ms. Shruti Sethi 34 - 51
Advanced Emerging Markets
EDITOR’S NOTE
Arindam Banerjee
Editor (AFAR)
Email: abanerjee@asiapacific.edu
Cell: 9711694689
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Asia-Pacific Finance and Accounting Review
Vol. I, No. 1, October - December 2012
pp. 5-16, ISSN: 2278-1838
www.asiapacific.edu/far
This study examines the stock price reaction to announcement of 205 rights offer of equity in India made during the
period April, 2000 to March, 2011. It adds to the limited study of impact of rights offer conducted in the Indian
context where rights offer is the most preferred for subsequent equity issue. We observe positive but statistically
insignificant market response to the rights issue. The results are consistent with those observed in developing
countries. Moreover, the abnormal returns observed around the announcement date hold a negative relationship
with decrease in leverage and the price discount offered in the rights issue.
1
Cairn Energy India Limited, INDIA (E-mail: akshita.agarwal@ymail.com)
2
XLRI, School of Business and Human Resources, Jamshedpur, INDIA. (E-mail: pitabasm@xlri.ac.in)
6
statistically insignificant market response. These results Neutral Event hypothesis. We also find strong evidence
differ from those obtained in developed markets such as of the Decreased Leverage hypothesis and Increased
US and UK but are consistent with the results obtained in Liquidity hypothesis. However, we only find partial
lesser developed markets of China, Finland and Norway. evidence of the Overvaluation and Overinvestment
Our study adds to the limited studies conducted in this hypotheses. The rest of the paper proceeds as follows.
field in India (Marisetty et al, (2008)) and helps to Section 2 reviews the set of literature in this area. Section
understand the relevance of firm specific and issue 3 describes our model. We also give details of our data in
specific factors in the Indian context. We utilise event this section. Section 4 reports our key results. Finally,
study methodology to examine market response to rights section 5 concludes the study.
offer during the specified period and then investigate the
determinants of the abnormal returns observed during the
Literature Review
announcement date. We do not use the effective date as Empirical results on the reaction of the market to rights
the market comes to know of the issue on the issue made by companies are mixed. Capital markets in
announcement date itself and in an efficient market, the the U.S. and UK, for example, react negatively to rights
entire reaction of the market would be felt on the issue announcements whereas the reaction of markets in
announcement date itself. China, Finland, and Norway is neutral to the rights
announcements (Shahid et al (2010), Tsangarakis (1996),
We propose five possible hypotheses that may explain
Adaoglu (2001), Kang and Stulz (1999), Eckbo and
the stock price reaction to the announcement of the rights
Masulis (1992), and Owen and Suchard (2008)). These
issue. Our first hypothesis, the Value Neutral Event
differences can be explained by sample sizes and country
hypothesis argues that in an informationally efficient
specific factors such as severity of adverse selection
market, rights issue should have no effect on the
problems, structural differences in issuing firms,
shareholders’ wealth and hence it predicts no reaction
liquidity, price elasticity of assets in small capital
from the market on the announcement date. However,
markets and tax and regulatory differences (Owen and
following Myers and Majluf (1984), we propose a
Suchard, 2008).
second hypothesis, namely, the Overvaluation
hypothesis which argues that management would go for Tsangarakis (1996) finds that the statistically significant
an equity issue when the stocks are overvalued and the positive abnormal stock returns to rights issue
market would react negatively to the rights issue announcements in Greece are primarily due to the
announcement as it signals overvaluation of the stock. If amount of capital raised relative to the existing capital,
the market believes that the management is investing the relatively larger ownership concentration and the market
funds raised in negative NPV projects, then the stock conditions prevailing prior to the rights issue
price may decline even if there is no signalling of announcement. Kang and Stulz (1999) further support
overvaluation of the stock. We, therefore propose this finding and report a significant positive
Overinvestment hypothesis that argues that if the rights announcement effect of 2.2% in Japan. Shahid et al
issue announcement signals about the poor quality of the (2010) observe positive market reaction after the
projects, then the market reaction will be negative. announcement of rights issue on the Board of Meeting
Rights issue also decreases the leverage of the company date in China. Miglani (2011) also reports positive excess
and hence the market revises its valuation of the tax returns from India.
shields that leverage offers to a company. We propose Andrikopoulos (2007) documents long term
Decreased Leverage hypothesis, our fourth hypothesis underperformance following rights issue across all
that argues that the reaction of the market to the rights industries. He reports evidence that post issue negative
announcement should be negative. Finally, we propose a performance can be considered as the reaction of
fifth hypothesis, Increased Liquidity hypothesis, that investors to prior excessive stock valuations and
argues that the fall in the price of the stock makes the reaffirms the information asymmetry hypothesis and
stock more attractive to the retail investors and hence the managers overconfidence hypothesis. Owen and
market should react positively to the rights Suchard (2008) find that the announcement of rights
announcement. issue of equity in Australia is met with a significant
Overall, we find that rights issue has positive but abnormal return of -1.83% and these abnormal returns
insignificant effect on the stock returns on the continue even after the announcement. Balachandran et
announcement date. This is consistent with the Value al (2007) observe average abnormal return of -1.74% for
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
7
a three day announcement period over a sample of 636 basis. Thus the rights offering acts as a signal to outside
rights issue announcements inAustralia. investors of high degree of private benefits in the firm
Announcement effects of rights issue in US have been and is interpreted negatively leading to negative
found to have negative effect on stock returns in all the abnormal returns after announcement date.
research studies. Eckbo and Masulis (1992) document Jung, Kim and Stulz (1996) argue that when managerial
statistically significant two day announcement period interests (agent) are not aligned with those of
return of -1.03% for industrial users and -0.53% for shareholders (principal), managers may choose to invest
utility users in standby rights offering. Jung, Kim and in value destroying opportunities aimed at fulfilment of
Stulz (1996) report that announcement of seasoned personal objectives at the expense of shareholders’funds.
offerings of common stocks in the U.S. leads to a 3-4% Investors’ awareness about such potential misuse of
average abnormal decline in stock prices in a period of funds raised in rights offerings leads to negative reaction
two days. Ngatuni et al (2007) observe from a sample of to the announcement.
818 rights issue that 63.57% of the issuing firms Masulis and Korwar (1986) argue that firms on the
experienced negative post-announcement abnormal average are underleveraged and thus fail to take the full
returns statistically significant at 1% level. Gajewski benefit offered by tax shield of debt. The announcement
and Ginglinger (1998) document significantly negative of rights issue further increases the equity and lowers the
abnormal returns around announcement dates in France. debt to equity ratio. The decreases in leverage through
Marisetty, Marsden, and Veeraraghavan (2008) and equity issues are thus interpreted negatively and lead to
Suresh and Naidu (2012) report insignificant excess negative abnormal returns at the announcements.
return in India.
Scholes (1972) argues that the demand curve of each type
Various explanations have been offered to explain of security is downward sloping and as per the principle
market reaction to announcement of rights issue by firms. of ceteris paribus the price of a block of shares is
Myers and Majluf (1984) argue that the market reacts negatively related to demand. Thus, rights issue
negatively to any equity issue made by a company. They increases the supply of shares and thus should lead to a
argue that the management has more information about decrease in the share price.
the value of the stock and hence the management would
issue equity only if they find the stock to be overvalued. Altinkilic and Hansen (2003) observe that firms offering
So the market looks at the equity issue as a signal that the relatively larger amounts in rights rely on discounted
stock is overvalued. Eckbo and Masulis (1992) apply this offering to ensure full take up of the shares. Owen and
model to rights offering under certain broad assumptions. Suchard (2008) document that issues made at a premium
observed an announcement return of 4.17% in
Myers and Majluf (1984) state the adverse selection comparison to -2.64% returns for issues made at a
problem inherent in the issue of new shares because of discount. Thus the issue price acts as a signal of quality to
the potential of wealth transfers from old to new the market. Moreover, they further observe that
shareholders. Of course, in a rights issue, if existing renouncing the rights issue reduces the level of discount
shareholders are expected to take up all the new shares offered with 26.61% discount given on renounceable
the adverse selection issue does not exist. However, this rights issue in comparison with 35.05% discount offered
is not true for firms in general and thus rights issue on non-renounceable issues.
announcement leads to negative reaction amongst
shareholders. Balachandran et al (2008) further corroborate this
finding and observe that high quality firms signal their
Wu and Wang (2002) suggest an alternative theory based quality by selecting lower issue price discounts. Kabir
on private benefits of control enjoyed by the and Roosenboom (2002) observe that relative offer price
management which are against the shareholder wealth is significantly positively related to the stock return and
maximisation and are not known to outside investors. operating performance and firms with larger offer price
They argue that the announcement of rights offering discount exhibit larger decline in performance.
cause a larger drop in the stock prices of the issuer when
the pre-issuance firm specific market condition looks As can be seen from the above literature review, there is
poorer. Rights offering generally do not tend to increase no consistency in the research finding on the effect of
the level of monitoring of existing management since rights issue announcement on the stock returns. Even
they are offering to current shareholders on a pro rata within India, research by Miglani (2011) reports positive
excess return while research by Marisetty, Marsden, and where the rights ratio is m:n and the issue price is X. It is
Veeraraghavan (2008) and Suresh and Naidu (2012) important to note that for the rights issue to succeed, the
report negative but insignificant excess returns. This following condition must hold:
shows that research in this area is not conclusive and
X ≤PO–ε1 (3)
hence we get motivated to conduct this study in India
again by using a much larger sample size and for a If the above condition does not hold, then the rational,
different time period that the time period used in earlier profit maximizing shareholders will prefer not to
studies. exercise the rights as being a free-rider is a positive NPV
strategy here.
Based on the above simple model, we propose and test
Methodology and Data Description five hypotheses to explain the possible reaction of the
Both Miglani (2011) and Suresh and Naidu (2012) use market to the announcement of the rights issue.As per the
relatively smaller samples and in this paper we decide to Value Neutral Event Hypothesis, since rights issue is a
use a larger sample size to carry out our test. We include value neutral event, the market should not react to the
all the rights issues that have been made in India in the announcement of a rights issue. Of course, the price of
2000 – 2011 period (and for which we get the relevant the stock should fall after the stock goes ex-rights. The
data from Prowess database of CMIE). We discuss our stock price, however, should not change on the date of the
data selection criteria later in this section. We also use the announcement (cum-rights price). This model actually
standard event study methodology that all the researchers assumes that the market has valued the stock correctly
have used to find the impact of rights issue and ε0 and ε1 equal 0.
announcement on the stock returns. The value neutral event hypothesis presumes strong-
form efficiency on the part of the stock market. If,
Our Model however, the managers of a company have better
We propose a simple model in this paper to look at the information about the value of the stock as compared to
likely impact of a rights issue announcement on the stock the outsiders (as suggested by Myers and Majluf (1984)),
returns. We assume that the management has better then the market may react negatively to a rights issue.
information about the true value of the stock. In This happens when the market perceives ε0 to be
particular, we assume that P0 is the pre-announcement positive. We call it the Overvaluation Hypothesis. The
price of the stock and that P̄ is the true value of the stock. managers will obviously prefer equity issue (over debt
issue), if they believe the stock is overvalued. Hence the
We assume that: P̄ =Po – εo (1) market reacts negatively to any equity issue as equity
In our model, only the promoters know the true value of issue signals possible overvaluation of the stock. If X is
εo The stock is overvalued if εois positive. sufficiently low, then the market may believe ε1 to be high
and that would definitely lead to a negative reaction by
When the rights announcement is made, the market the market on the announcement date. So the
revises its valuation of the stock and P1 is the post Overvaluation hypothesis predicts a negative reaction
announcement price (the cum-rights price). from the market to any rights issue. In addition, the
We make the following assumption about P1. reaction should be highly negative for issues with higher
discounts.
P1 =Po – ε1 (2)
The rights issue may signal the market about the poor
Here, ε1=E(εO),where E(.) is the standard expectation quality of the project in which the management invests.
operator. Financing any new project with debt always has the
The abnormal return on the announcement date will be disciplinary effect on the management of the company.
strongly related to P1 – P0, which is actually equal to Equity issue has no such disciplinary effect and a rights
issue may signal the market about the poor quality of the
following Equation (2). So the abnormal return observed
projects in which the management is going to invest. We
on the announcement date will depend on the sign of ε1 .
call this the Overinvestment Hypothesis and as per this
The ex-rights price will be given by hypothesis, one should expect a negative reaction by the
P1 n + X m market on the rights announcement date. The
n+m
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
9
overinvestment signal would be particularly strong for stock price. Since the stock price comes down because of
companies that have performed poorly just prior to the the bonus effect, the stock becomes more accessible to
rights issue. This hypothesis is similar in spirit to Jensen the retail investors. So in case retail investors have
(1986). invested substantially in a company, they would treat the
There is another reason, why the market may react rights issue more favourably and that should marginally
negatively to a rights issue. The market might have increase the stock price. We call this the Increased
valued the stock assuming a fixed debt ratio (this is the Liquidity hypothesis.
standard practice followed by most valuation A rights issue may decrease the reported earnings per
professional). Rights issue decreases the debt ratio of the share if the funds raised are invested in projects that do
companies and the market may revise downwards the not give immediate returns. This dilutive impact of the
present value of the expected tax shield. We call this the rights issue may reduce the stock prices if the market
Decreased Leverage Hypothesis. Secondly, instead of values the stocks using the same earnings multiple that it
financing any new project with debt (with associated used earlier. However, in an efficient market, the market
disciplining effect of debt), when a company finances it participants will definitely revise the earnings multiples
with equity, the market may get the signal that the based on the profitability of the new projects in which the
management is investing capital in projects with poor company invests its money. We therefore, ignore this
quality. Decrease in leverage will revise the P0 value itself possibility here.
in Equation (2), keeping ε1 constant. This argument is Table-1 summarizes all the hypothesis we have
also similar to Jensen (1986). developed (and tested) in this paper along with a brief
Rights issue can however, have a positive effect on the discussion on the possible effect of rights issue
Overvaluation Hypothesis Negative excess return Follows from Meyers and Mujluf
(1984).
Decreased Leverage Hypothesis Negative excess return Similar to the argument made by
Jensen (1986)
Increased Liquidity Hypothesis Positive Excess Return Rights issue increases the liquidity of
the stock by making it cheaper and
hence the stock returns may be high.
announcement on the stock returns. for which the relevant firm-specific information is not
available in the Prowess database. This filtering criterion
Data reduced our final sample size to 205 issues. Our final
We start by including all the rights issues for which the sample, therefore, consists of 205 rights issue of equity
event announcement date is available in the Bloomberg made by 170 firms during the period April 1, 2000 to
Database Services. Since Bloomberg provides rights March 31st 2011. We obtain the rights issue data from the
announcement data only from 2000, we restrict our Bloomberg Database Services.
sample period to 2000-2011. During this sample period, a Table 2 provides a breakdown of the 205 rights issues in
total of 365 rights issue was made in India. We obtain the sample by year of announcement. We also provide the
firm specific information about these rights issues from aggregate size of the issues for each of the years in Table
the Prowess database of CMIE. We remove all the issues 2. In our sample, the highest number of announcement of
rights issues was witnessed in the year 2005 with 31 capital raised each year with the maximum capital being
rights offer. There is significant variance in the amount of raised in 2005 amounting to Rs. 7,041.28 crores.
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
11
For the sample of N securities, the Mean Abnormal consistent with other studies conducted in developing
Return (MARt) on any event day t is calculated as: nations, Shahid et al (2010) in China, Tsangarakis (1996)
in Greece, Adaoglu (2001) in Istanbul and Kang and
MARt= Σ AR i,t
(5) Stulz in Japan (1999). However, these results differ from
N the results observed in developed nations, Eckbo and
The statistical significance of Mean Abnormal Returns Masulis (1992) in the US, Gajewski and Ginglinger
and the Cumulative Abnormal Returns (CAR(t1,t2)) (1998) in Greece, Owen and Suchard (2008) inAustralia.
(which is calculated by summing mean Abnormal Table 3: Daily average market adjusted abnormal
Returns over event days t1 to t2), are tested by the returns and the corresponding t-statistic around the
following t-statistics: announcement day of 205 rights offer of equity by
firms listed on the Bombay Stock Exchange, 2000-
2011
tMAR,t= MAR1 (6)
σ
Even on the date of the announcement i.e. t=0 the return 1.00%
is 0.84% but statistically insignificant. This gives 0.80%
credence to the Value Neutral Event hypothesis. In an
0.60%
informationally efficient market, one should expect the
0.40%
market reaction to the rights announcement to be neutral.
0.20%
We can also see from Figure 1 that there is no particular 0.20%
trend in the CAR around the announcement date. It
0.20%
fluctuates over the entire time period. The abnormal
-5 -4 -3 -2 -1 0 1 2 3 4 5
returns observed after the announcement day are
Event Period
observed to be higher than that witnessed on the day of
the announcement with average abnormal returns of
1.48% on day 1 as compared to 0.84% on day 0. Figure 1: The Mean CARs over the event window
However, after day 1 the abnormal returns progressively period [-5, +5] for all 205 rights issues in our sample
decrease falling to 0.34% on day 5. This result is
consistent with that observed in the other Indian study
conducted by Marisetty et al (2008). This result is also
Cross SectionalAnalysis and also helps measure agency problems in the firm
(Burch et al, 2001). Stocks that are overvalued will have a
Though the average CAR is insignificant, it is possible higher MB ratio. The level of information asymmetry
that the market reacts positively to some rights issues, will also be high if the MB value is high for a stock, as
while reacting negatively to others. We use cross- most of the market value consists of intangibles like
sectional regression to identify the firm-specific growth opportunities. So as per our Overvaluation
characteristics that can further explain the firm-level hypothesis, one would expect a negative relationship
variation in abnormal returns. Our regression between MB and abnormal returns. Low market-to-book
specification is given below: would be observed for stocks with relatively poor
Abnormal Returns = β0+β1Size+β2MB + β3DISC + financial performance. So a low market-to-book would
β4LEVERAGE + β5PromoInt + β6IndivInt + β7InstInt + + increase the chances of overinvestment and hence as per
β8ISSUE (8) our Overinvestment hypothesis, one should expect a
positive relationship between the market reaction to the
where, rights issue and the market-to-book ratio.
Size is the pre-announcement market capitalization of Balachandran et al (2008) report that firms with better
the stock prospects of future earnings would offer lower price
MB is the market-to-book ratio of the stock discounts as compared to firms with poorer prospects.
This view is also consistent with our Overinvestment
DISC measures the discount at which shares are issued hypothesis. If the level of information asymmetry is
compared to the existing market price of share (a value of higher, then one would expect a negative relationship
-0.3, for example, signifies that the issue was made at a between abnormal returns and the discount (DISC)
30% discount) offered (Overvaluation hypothesis). However, higher
Leverage is the change in the debt-equity ratio of the price discount would lower the ex-rights price of the
issuing company stock and hence the stock would be more liquid after it
PromoInt is the equity stake of the promoter in the goes ex-rights. So as per our Increased Liquidity
company hypothesis, a higher discount would result in higher
abnormal returns.
IndivInt is the equity stake of the retail investors
LEVERAGE seeks to factor the impact of change in
InstIint is the equity stake of the institutional investors capital structure on the stock price. Suchard and Owen
Issue is the ratio of issue size to the market capitalization (2008) suggest the ratio of debt-equity (post
of the firm on the last trading day prior to the announcement and pre-announcement) as a proxy for the
announcement change in leverage associated with the announcement of
the rights issue If the firm does not change the absolute
Balachandran et al (2007) and Suchard and Owen (2008)
value of debt after the rights issue, then this ratio
suggest that firm size is an inverse proxy of the level of
completely ignores the effect of debt. We, therefore use
information asymmetry as larger firms are more closely
the arithmetic difference between post-announcement
followed by the market. Size is measured as the natural
and pre-announcement Debt-equity ratio as a proxy for
logarithm of the market capitalisation of the firm on the
leverage. Since, rights issue decreases the leverage for a
day before the announcement and serves as a proxy for
company, it affects the stock price adversely and hence as
firm size. Since larger companies will have lesser
per our Decreased Leverage hypothesis, we should find a
information asymmetry, our Overvaluation hypothesis
negative relationship between LEVERAGE and
would predict a flat relationship between firm size and
abnormal returns.
abnormal returns. It is, however, possible that managers
of large companies would like to maintain the size of the We also include the equity ownership stake of the
companies (or increase it further) because of the prestige promoters, retail investors and institutional investors
they get from managing a large company. So, our prior to the rights announcement as independent
Overinvestment hypothesis would postulate a negative variables in the regression. IndivInt represents the
relationship between size and abnormal returns. percentage interest in the firm held by retail investors.
Retail investors like the increased liquidity following a
The market-to-book ratio (MB) serves as a proxy for the
decrease in the price after the rights price. As per our
growth prospects of the firm as perceived by the market
Increased Liquidity hypothesis, stocks with higher retail
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
13
ownership should exhibit positive reaction from the the date of announcement may be different for the
market to the rights issue announcement. So one should different hypotheses.
expect a positive relationship between abnormal returns The dependent variable CAR [-1,+1] is the cumulative
and the equity stake of the retail investors. abnormal return for the firm between days [-1 to +1]. We
We include PromoInt to capture the equity ownership use a 3 day event period in order to capture the full impact
stake of the promoters in the firm. Research shows that of the announcement effects of rights issue. Moreover,
higher stake by the management aligns the interest of the since highest abnormal returns have been observed in
management with that of the other shareholders. this period it will help us identify all the parameters
(Kaplan, 1994; Murphy, 1985) Higher equity stake by the having effect on the abnormal returns observed. This is
management reduces the conflict of interest between the the reason, we do not use the longer window period (-5 to
management and the shareholders and this also ensures +5) that we discussed in Table 4.
that the management will not invest money (raised from We present our regression results in Table 3. We find very
the rights issue) in projects with poor quality. A higher strong support for our Decreased Leverage hypothesis
stake by the promoter would discourage overinvestment here. We defined our leverage as the change in leverage
on the part of the company and hence this argument following a rights issue. So the abnormal returns have
indirectly supports our Overinvestment hypothesis. So been highest when the decrease in leverage is the lowest
one should expect a positive relationship between (or increase in leverage is the highest). The change in
abnormal returns and promoters’stake. leverage will be the lowest following a rights issue with
We use the variable InstInt to capture the equity interest the smaller issue size (as a percentage of market
of the institutional investors in the firm. This variable capitalization). From Figure 3, we can see that issue size
serves as a proxy for the effective monitoring by the is negatively correlated with abnormal returns. So when
institutional investors. Higher institutional investors the issue size is the highest, the decrease in leverage is
holding shall lead to greater incentives to monitor the also high and the market reacts negatively to any such
performance of the companies and thus should have a rights issue.
positive relation with the announcement returns. Of course, negative reaction to issue size is also in
Secondly, the stocks in which these investors invest are conformity with our Overinvestment hypothesis and
highly researched and hence the information asymmetry Overvaluation hypothesis. If the stocks are highly
due to overvaluation of the stock will be lower. So our overvalued, then the management may find it worthwhile
Overvaluation hypothesis predicts a positive relationship financing any new project with issue of equity. Relatively
between abnormal returns and institutional investors’ larger amount of capital can be raised from the market at
stake. what the management perceives to be the fair value of the
We use the issue size (ISSUE) as an additional variable in stock. Secondly, if the projects are not of investment
our regression. If the issue size is very large, then our quality then a larger issue would result in larger value
Decreased Leverage hypothesis would predict a negative loss on the part of the shareholders.
relationship between the issue size and the abnormal We observe significant negative relationship between
returns. Secondly, if equity is overvalued, the price discount (DISC) and announcement returns. This
management is more likely to finance a larger project result is however, not consistent with the results found by
with equity than with debt and hence the Overvaluation Heinkel and Schwartz (1986), Loderer and
hypothesis should also predict a negative relationship Zimmermann (1988) and Owen and Suchard (2008).
between abnormal returns and issue size. Finally, a large Since price discount is a negative variable
issue size (for overinvesting companies) magnifies the (-30% means the issue price is 30% lower than the pre-
value loss following the rights issue and hence the announcement price), a negative relationship with
Overinvestment hypothesis would predict a negative abnormal returns actually implies that the market reacts
relationship between issue size and abnormal returns. positively when the price discount is higher (i.e., more
As can be seen from the above discussion, the five negative). A larger price discount implies a larger decline
hypotheses we postulate in this paper are not competing in the ex-rights price and that makes the stock more
hypotheses that explain the reaction of the market to a affordable to the retail investors. This result lends strong
rights issue. In fact, different hypotheses may explain the support to our Increased Liquidity hypothesis.
same phenomenon and the expected sign of the CAR on
Table 4: OLS Estimates of coefficients in linear cross test the various hypotheses properly. Thus for example,
sectional regressions with the announcement return price-to-book is often used as a proxy for overvaluation
over (-1,1) as the dependant variable of the stock and adding this in the cross-sectional
regression could help us in testing the overvaluation
Regression Output
hypothesis. Similarly, size was added as an additional
Abnormal Returns = β0+β1Size+β2MB + β3DISC regressor to control for any possible association between
+ β4LEVERAGE risk (as envisaged by Fama and French, 1993) and
+ β5PromoInt + β6IndivInt + β7InstInt + + β8ISSUE returns.
2
A. R 0.31 We find that announcement of rights issue of equity are
Adjusted R2 0.29 met with insignificant positive reaction which is similar
Standard Error 0.086 to a number of developing economies. Since rights issue
F 11.198**** is a portfolio of a public issue at the prevailing market
B. β Std. Error t-stat price and a bonus issue, theoretically, a rights issue
should have no effect on the price of the share
Intercept 0.1077 0.0421 2.557 *** (immediately after the announcement) in an
Size -0.0069 0.0040 -1.737 * informationally efficient capital market. Financial
MB 0.0007 0.0007 0.985 economists consider rights issue value-irrelevant
DISC -0.0107 0.0029 -3.747 **** information. It is heartening to find that the post
LEVERAGE 0.0006 0.0001 7.320 **** announcement effect of the Indian stock market to a
Promlnt -0.0002 0.0004 -0.498 rights issue is value neutral. This result also supports our
Indivlnt -0.0005 0.0005 -0.888 Value Neutral Event hypothesis.
Instlnt -0.0011 0.0007 -1.524 Using cross-sectional regression, we make an attempt to
ISSUE -0.0244 0.0112 -2.187 ** find the firm- and issue-specific factors that can explain
the cross-sectional variation in the abnormal returns
observed after a rights issue announcement. We observe
Note: *Significant at 10% level, **Significant at 5% a very strong and positive relationship between increase
level and, *** significant at 1% level, and **** signifies in leverage and the abnormal returns. Rights issue, being
significance at 0.1% level. an equity issue, decreases the leverage of the company.
In addition, we observe moderately significant negative We find that rights issues that cause the lowest change in
relationship between size of the firm and the abnormal leverage bring about the maximum increase in stock
returns generated. This is consistent with the results returns. This result strongly supports our Decreased
obtained by Balachandran et al (2008) and Asquith and Leverage hypothesis. We also find a strong and negative
Mullins (1986). Since larger companies attract investors’ relationship between price discount offered on rights
attention, they are usually more researched and hence are issue (DISC) and the announcement returns generated
less likely to be overvalued. This result however, does which is inconsistent with the results obtained in prior
not support our Overvaluation hypothesis. However, studies conducted in different countries. Larger discount
larger companies are more likely to invest in sub- in a rights issue causes the maximum decline in the ex-
investment grade projects as a larger size of the company rights stock price thereby making the stock more
increases the agency conflicts between the management affordable to the retail investors. So the stock price
and the shareholders. This result, therefore, gives partial increases as the liquidity of the stock increases after the
support to our Overinvestment hypothesis. rights issue. This is consistent with our Increased
Liquidity hypothesis.
Conclusion We also observe negative relationship between the size of
We examine abnormal returns generated from the the rights issue and the abnormal returns. This gives
announcement of a rights issue of equity in India. Our partial support to our Overinvestment hypothesis. The
study adds to the existing literature by including size of the firm (Size) was also observed to hold a
variables indicating firm level control such as size of firm negative significant relationship with the announcement
and MB ratio and issue level controls such as price returns.
discount and leverage. These controls were necessary to Indian stock market does like rights issues that cause the
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
15
largest decline in the ex-price of the stock as that makes Takeup, Renounceability, and Underwriting Status,
the stocks more affordable and hence more liquid. We Journal of Financial Economics, 89, 328 – 346.
also see that the market does not like leverage-reducing
7. Brown, S. and J. Warner, 1980, Measuring Security
strategies as the companies lose on valuable interest tax
shields. Secondly, a decrease in leverage reduces the Price Performance, Journal of Financial Economics,
disciplinary effect of debt. 8, 205-258.
Rights issues usually dilute the earnings per share and in 8. Brown, S. and J. Warne, 1985, Using Daily Stock
an inefficient market where the analysts continue to Returns: The Case of Event Studies, Journal of
value the stocks using the pre-rights-issue price-earnings Financial Economics, 14, 3 – 31.
multiples, the companies going for rights issue will 9. Burch, Timothy R., Nanda, Vikram K. and Christie,
observe a decline in stock returns. It is therefore possible
William G., 2001, The Rights Offer Puzzle: Clues
that, the net effect that we find is the cumulative effect of
from the 1930s and1940s, Available at SSRN:
the negative impact (due to dilution in EPS) and the
positive (or negative) effect of other factors that we http://ssrn.com/abstract=283011. Accessed in
considered in this paper. We leave this to our future October 2011.
research. 10. Campbell, J. Y., A. W. Lo, and A. C. Mackinlay,
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one can look at the stock returns of the company in the Princeton University Press, Princeton, New Jersey.
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returns of other companies in the industry will give us
Disappearing Rights Offer Phenomenon, Journal of
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12. Eckbo, B. Espen and Masulis, Ronald W., 1992,
Adverse Selection and the Rights Offer Paradox,
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Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Asia-Pacific Finance and Accounting Review
Vol. I, No. 1, October - December 2012
pp. 17-33, ISSN: 2278-1838
www.asiapacific.edu/far
Mergers and Acquisitions (M&A) are the inorganic growth strategies which have got its significance in today’s
corporate world due to intensely competitive business environment. While M&A is considered as one of the strategies
for growth, the companies are expected to perform post M&A so that those are proved to create wealth for
shareholders. From the literature review it is found that there is no conclusive evidence about the impact of M&A on
corporate performance. Moreover in recent period M&A deals have gone up manifold. Hence there is a need to look
into the post M&A performance of companies. The present study is an attempt to find out the difference in post-
acquisition performance compared with pre-acquisition in terms of profitability, liquidity and solvency. The scope of
the study is limited to manufacturing sector companies in India. The statistical tools used are Paired Sample t-Test
and Wilcoxon Signed Ranks Test.
Today’s corporate world is surrounded with changing Literature review has been made on impact of mergers
and acquisitions on the company’s operating and
business environment in relation to intense competition,
financial performance. Most of research works are done
diversified products, global markets, educated
in United States of America & United Kingdom apart
customers, new technology and advanced process of
from Malaysia, Japan, Australia, Greece, Canada,
manufacture. It is not enough for the companies to keep
Taiwan, Thailand and India. Few numbers of studies are
pace with these changes but is expected to beat done with respect to Indian Mergers and Acquisitions.
competitors and innovate in order to continuously Literature has not been able to provide conclusive
maximize shareholder value. Growth is inevitable for the evidence whether M&A create value or destroy wealth of
companies to keep pace with the changes. The growth shareholders. The literature review is basically on
strategy is divided into two types: Organic Growth ‘Studies using Accounting Measures’, ‘Studies using
Strategy and Inorganic Growth Strategy. Mergers and Event Study Methodology’, and ‘Studies using Multiple
Acquisitions (M&A) are the inorganic growth strategies Performance Measures’.
for achieving accelerated and consistent growth. It has
Studies using Accounting Measures
gained importance throughout the world in the current
scenario due to globalisation, liberalisation, Merged firms show significant improvements in
technological developments and intensely competitive operating performance (Ghosh, 2001). There is
business environment. The greater than before improvement in post-merger operating financial
competition in the global market has encouraged the performance measured by industry-adjusted return on
Indian corporate to go for mergers and acquisitions as an assets (Ramaswamy and Waegelein, 2003). Using book
important strategic alternative to survive and grow. value of asset and sales model, corporate performance
improves after merger (Kumar and Rajib, 2007).
1
Research scholar at Vinod Gupta School of Management, IIT Kharagpur, INDIA. (E-mail: leepsa@vgsom.iitkgp.ernet.in)
2
Asst. Professor, Vinod Gupta School of Management, IIT Kharagpur, INDIA. (E-mail: csmishra@vgsom.iitkgp.ernet.in)
18
Financial performance of merged companies improve All significant positive merger benefits occur during the
(Vanitha and Selvam, 2007). first year (Shick and Jen, 1974). The financial
Acquisition growth is much lower than internal growth performance of Japanese manufacturing companies
but there is an additional and permanent reduction in using the rate of return on equity increased after merger
profitability following acquisition (Dickerson, Gibson, (Katsuhiko and Noriyuki, 1983). There is a significant,
and Tsakalotos, 1997). The acquiring firm experience positive co-movement in vertical merger activity and
reduced operating performance after acquisition (Yook, wealth effects (Goyal, 2002). The performance ratios
2004). The profitability, liquidity and solvency of that have legal implications (capital adequacy and
combined company declines after the M&A event. The solvency ratios) improved after the merger (Kithinji and
negative performance is not different from control firms Waweru, 2007).
(Ooghe, Laere, and Langhe, 2006). The profitability of a The performance of merged firms improves significantly
firm that performed an M &A is decreased due to Merger following their combination. Buyers, targets and
andAcquisition event (Pazarskis et al., 2006). combined firms underperform their peers in five years
Studies using Event Study Methodology before merger, and outperform their peers in five years
after (Carline, Linn, and Yadav, 2001). Using event study
Event study is the approach for the examination of and accounting approach it is found that the stock price
abnormal stock returns to the shareholders of both and operating performance of the acquirers
bidders and target around the M&A announcement. underperformed compared to firms that did not engage in
There is a statistically significant positive return to M&A activity (Becker, Goldberg and Kaen, 2008). The
acquiring firm shareholders (Asquith, Bruner, and returns to the acquirers were marginally negative from
Mullins, 1983; Loderer and Martin, 1992). Bidding firms the serial acquisition of technology firms (Adavikolanu
do not under perform relative to the market (Jakobsen and Korrapati, 2009). Studies have failed to provide
and Voetmann, 2003). Acquisitions by small firms are evidence regarding the relation between industry
profitable for their shareholders, but these firms make relatedness and the Post-M&A performance. There is no
small acquisitions with small dollar gains. Large firms consensus view in the literature regarding the effects of
make large acquisitions that result in large dollar losses firm size on Post-M&A performance (Ismail, Abdou, and
(Moellera, Schlingemannb, and Stulz, 2004). The Annis, 2011).
acquisitions from 1905 to 1930 raised shareholder wealth
(Leeth and Borg, 2004). The cumulative abnormal return Research Objectives
is statistically significant giving positive returns to Based on the research gap areas from the literature
acquiring firm shareholders (Chakrabarti, 2008; Dutta survey, the following are the objectives of the study:
and Jog, 2009; Kyriazis, 2010; Soongswang, 2009). • To find out the long term post acquisition financial
Over the long-term, in the post-announcement period, performance in manufacturing sector companies in
acquiring firms earn lower returns relative to those India.
earned in the pre-acquisition performance but their Research Methodology
relative performance remains exceptionally good, on
average (Rosa et al., 2003). Corporate performance does 4.1 Hypotheses
not improve after merger, if performance is evaluated Based on the research gap areas from the literature
using market value model (Rajib, 2007). Target firm gain survey, the following research hypotheses are
from the takeovers, while acquiring firm just break even tested:
and combined gains were small. The cumulative
1Ho: There is no difference between the Post-
abnormal return is positive to the target firm shareholders
Acquisition financial performances in
(Leeth and Borg, 2000). The bidder shareholders gain in
manufacturing sector companies in India
long run (Fuller, Netter, and Stegemoller, 2002);
Gregory, 2005). 2Ho: There is no difference in performance of
acquirer acquiring relatively large and small
Studies using Multiple Performance Measures
companies
Several studies are reviewed under category of multiple
3Ho: There is no difference in performance of large
performance measures as those may not be classified
size companies and small size acquiring companies
solely to accounting approach or event study approach.
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
19
t=
x̄ –μ0
W+ =
i=1
Σ
øiRi
s
√n
where øi= I(Zi>0)
Where, I(.)is an indicator function,
s is the standard deviation of the sample and n is the θ = median ; Zi = Yi - Xi
sample size.
The study is carried out over various years under
The degrees of freedom used in this test is (n – 1) consideration using Accounting Based Approach using
x̅1 (Pre-M&A) and x̅2 (Post-M&A) are sample different financial parameters .
statistics
Table 1 : Variables of the Study
All the financial performance parameters are adjusted for Basic Specifications for the Study includes the
industry average. Industry average represents the following-
performance of companies that have not gone through • The M&A cases are classified into large and small
merger and acquisition during the period under acquirers and also on basis of relatedness.
reference.
• Total Assets is taken as the proxy for the size of the
companies. in India.
• The median of the total assets of the acquirer 4.5. Sample Selection
company in the acquisition year is taken into • The sample consists of only manufacturing
consideration for segregating the acquirer into large companies.
and small companies.
• Unlisted firms are eliminated due to unavailability
• For the relative size of the companies (size of of financial information.
acquirer to size of target) the total assets of the
acquirer is compared with the total assets of the • Acquisitions involving firms in banking and
target companies in the acquisition year. financial services industries (BFSI) are not
considered due to the fact that these industries
4.2. Period of Study performance is generally affected by other
The period of study is from 2000-01 to 2009-2010. This economic environmental factors compared to
period specially chosen to so that the performance of the manufacturing sectors. Financial performance
acquisition deals during 2003-04 to 2006-07 is done for measures as mentioned earlier are also not
pre-acquisition three years and post-acquisition three appropriate for firms in BFSI sector.
years. Data for these years are available. • The study is undertaken only for period of pre-
4.3. Sources of Data acquisition period of three years and post-
• CMIE Business Beacon Database acquisition period of three years due to availability
of data up to that period. The sample is further
• CMIE Prowess Database filtered so that three year pre and three year post-
4.4. Scope of Study acquisition data for both acquired and target
• The study is confined to post-acquisition companies are available.
performance of companies in manufacturing sectors
Total
2004
2004
2005
2005
2006
2006
2007
2007
%
%
Chemical 3 1 4 2 10 30 4 2 3 2 11 33
Food & Beverage 2 3 0 3 8 24 0 1 1 3 5 15
Textiles 1 1 2 1 5 15 1 0 3 1 5 15
Transport Equipment 0 0 1 3 4 12 0 0 1 1 2 6
Diversified 0 0 2 1 3 9 0 0 0 1 1 3
Metals & Metal Products 1 0 0 1 2 6 0 0 0 2 2 6
Miscellaneous 1 0 0 0 1 3 0 2 0 0 2 6
Machinery 0 0 0 0 0 0 2 0 1 1 4 12
Non Metallic 0 0 0 0 0 0 1 0 0 0 1 3
Total 8 5 9 11 33 100 8 5 9 11 33 100
Source: Compiled from CMIE Prowess Database
The highest number of deals found in done in chemical industry followed by food and beverage and textile companies.
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
21
III. Performance of acquiring firm when taking over relatively large and small companies
Table 5 Performance of Acquirer and Target companies using Paired Sample t Test
The current ratios of the acquirer declined while the return on capital employed and return on net worth has
increased in case of Target Company. The quick ratio and reduced after companies went for acquisition.
net working capital by sales ratio of both acquirer and In terms of the current ratio 13 companies have not
target companies improved after acquisition period. Debt improved in their liquidity position while eight
paying capacity has reduced in both target and acquiring companies have improved. In the quick ratio terms 16
firm. The profitability of the acquirer company improved companies have positive performance while five
while Target Company declined. companies have negative performance. In the similar
way post acquisition networking capital by sales ratio has
Any positive or negative change after post acquisition positive impact for 16 companies while negative for five
period is insignificant in case of acquirer. While based on companies. Debt burden has been more in post
the negative rank target companies, change in the acquisition period to 16 companies while less for four
liquidity ratio is significant for 5 companies. The return companies with one company that remained indifferent.
on capital employed of five companies has positively But to repay the debt burden 11 companies have positive
changed significantly. interest ratio in post acquisition period while 10
companies have negative interest coverage ratio. The
In case of performance of companies without taking the return on capital employed and the return on net worth
control firms into account, the current ratio has declined has reduced in 10 and 14 companies in post acquisition
(statistically insignificant) while the quick ratio has period respectively while 18 companies have improved
improved (statistically significant). This indicates that in their profitability ratios.
growth in inventory is less than the growth in other
Acquirer acquiring large target firms improves
current assets. The networking capital by sales ratio and
interest coverage ratio has gone up which is a good sign performance in terms return on net worth compared to
for the company but along with it the total debt ratio has acquirer acquiring small target firms. Acquirer acquiring
risen. The interest coverage ratio has increased which small target firms has better debt paying capacity
shows that the companies have better capacity to repay compared to those acquiring firms who purchase large
the debt they have taken. But increase in the interest target firms.
coverage ratio is not statistically significant. The
profitability ratios have shown a poor picture as both
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 6: Performance of Acquirer and Target companies using Wilcoxon Signed Ranks Test
ICR1
ICR1
TDR1
TDR1
ICR2-
ICR2-
NWC1
TDR2-
NWC1
TDR2-
NWC2-
NWC2-
ROCE1
ROCE1
RONW1
ROCE2-
RONW1
ROCE2-
CR2-CR1
RONW2-
RONW2-
CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 13 11 9 7 8 13 6 10 5 9 7 10 16 7
Positive Ranks 8 10 12 13 13 8 14 11 16 12 13 11 5 13
Ties 0 0 0 1 0 0 1 0 0 0 1 0 0 1
Mean 10.31 10.64 10.39 12.5 9.13 10.69 10 10.2 8.6 8.11 9.36 7.3 10.38 11.43
Rank
12.13 11.4 11.46 9.42 12.15 11.5 10.71 11.73 11.75 13.17 11.12 14.36 13 10
Test Statistics Z - - - - - - - - - - - - - -
0.643(^) 0.052(^) 0.765(#) 0.654(#) 1.477(#) 0.817(^) 1.680(#) 0.469(#) 2.520(#) 1.477(#) 1.476(#) 1.477(#) 1.756(^) 0.933(#)
Asymp. Sig. (2-tailed) 0.52 0.96 0.44 0.51 0.14 0.41 0.09 0.639 0.012 0.14 0.14 0.14 0.079 0.351
In case of relatively large target firms, the profitability networking capital/sales which reflects that companies
ratios have not improved but the decline is not have enough liquid assets after post acquisition period.
statistically significant. The liquidity ratio in term of the Return on capital employed has reduced (statistically
networking capital/sales have improved but it is significant) in the post acquisition period which indicates
statistically insignificant. In the leverage ratios, the that there is erosion of equity of the companies may be
interest coverage ratio have improved but it is because of less EBIT being generated to service the cost
statistically insignificant. But the debt has risen of borrowing.
significantly after acquisition. It may be because of the
In case of small size companies, the liquidity ratios have
fact that the acquirer has taken over relatively large target
improved after post acquisition period and also the
companies. The performance has reduced as the acquirer
interest coverage ratios but the result is statistically
company may have not been able to control a larger target
insignificant. The firm's ability to finance additional
company.
sales without incurring additional debt has increased
In case of relatively small target firms, the results suggest since the networking capital/ sales ratio has improved in
that there is a statistically significant difference between the post acquisition period. The leverage ratio in terms of
the pre and post-acquisition quick ratio, networking total asset to total liability has risen but statistically
capital/sales ratio, return on net worth/sales ratio. The insignificant. The profitability ratios show different
three ratios have declined in the post acquisition period. results for different parameter. In terms of return on
The safety margin in terms of being able to meet its capital employed the there is statistically insignificant
interest obligations of five negatively performed decline in performance while in terms of the return on net
companies has reduced but it statistically insignificant. worth there is improvement in performance but
statistically insignificant.
In case of large size companies, the quick ratio has
increased (statistically significant) along with
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 8: Post Acquisition using Wilcoxon Signed Ranks Test
Wilcoxon Signed
Ranks Test
ICR1
ICR1
TDR1
TDR1
ICR2-
ICR2-
NWC1
TDR2-
NWC1
TDR2-
NWC2-
NWC2-
ROCE1
ROCE1
RONW1
ROCE2-
RONW1
ROCE2-
CR2CR1
RONW2-
RONW2-
CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 13 5 5 4 14 10 14 8 5 6 6 12 17 15
Positive Ranks 8 16 16 16 6 11 7 13 16 15 15 9 4 6
Ties 0 0 0 1 1 0 0 0 0 0 0 0 0 0
Mean +Ve 10.62 9.9 6.9 9.38 10.2 11.86 11.64 10.25 10.8 10.17 10.5 11 11.94 10.47
Rank
-Ve 138 49.5 34.5 37.5 102 166 163 11.46 11.06 11.33 11.2 11 7 12.33
Sum of +Ve 11.63 11.34 12.28 10.78 11.73 7.33 9.71 82 54 61 63 132 203 157
Ranks
-Ve 93 181.5 196.5 172.5 129 44 68 149 177 170 168 99 28 74
Test Statistics Z - - - - - - - - - - - - - -
0.78(^) 2.29(#) 2.82(#) 2.52(#) 0.47(#) 2.28(^) 1.65(^) 1.16(#) 2.14(#) 1.89(#) 1.83(#) 0.57(#) 3.04(^) 1.44(^)
Asymp. Sig. (2-tailed) 0.43 0.02 0.01 0.01 0.64 0.02 0.1 0.244 0.033 0.058 0.068 0.566 0.002 0.149
Notes: The symbols used in this table as well as subsequent tables:
^: Based on Positive Ranks (Post-Acquisition Performance > Pre- Acquisition Performance)
#:Based on Negative Ranks (Post- Acquisition Performance < Pre-Acquisition Performance)
25
26
Table 9: Performance of Combined Firms where there are relatively Large and Small Target Firms
Paired Samples
Test Mean t Sig. (2-tailed) Mean t Sig. (2-tailed)
In case of large size companies, the changes in quick companies is quite significant in terms of profitability. In
ratio, networking capital by sales ratio, total debt ratio, case of unrelated acquisitions, there is significant change
return on capital employed, and return on net worth is in the quick ratio and networking capital/sales in post
statistically significant in post acquisition period. Based acquisition period. Around 11 companies have positive
on the negative ranks (Post TDR<Pre TDR, which means returns in terms of quick ratio and 9 in terms of
less debt burden in post acquisition period) total debt networking capital/sales ratio.
ratio is statistically significant for one company.
In case of related acquisitions, liquidity performance of
In case of small size companies, in terms of the liquidity the combined firm between chemical industry
ratios the positive performance after acquisition is done companies Indoco Remedies Ltd and Solvay Pharma
by 21 companies and negative performance by 12 India Ltd; textile companies R S W M Ltd and Cheslind
companies. In terms of the leverage ratios the 10 Textiles Ltd. has improved in post acquisition period.
companies have shown increase where as rest have The profitability performance of all the companies has
shown decrease. The improvement in the networking reduced in post acquisition period. Indoco Remedies Ltd
capital by sales is statistically significant. In terms of the and Solvay Pharma India Ltd deal has been successful in
profitability ratios the positive performance after reducing the debt burden in post acquisition period along
acquisition is made by eight companies while negative with increasing the interest paying capacity. But the rest
performance is made by 14 companies. of the related deals were unable to create interest paying
capacity and had high debt burden in post acquisition
In case of related acquisition deals, the profitability ratios
period.
reduced significantly after acquisition. In case of
unrelated acquisitions, there is significant improvement Limitations of the Study
in the liquidity of companies after acquisition in terms of
• Only manufacturing sector companies are
quick ratio and networking capital/sales ratio.
considered for the study.
In case of related acquisitions, the change in profitability • The period of study is up to 2004-2007, since three
for those companies where there is improvement (in year post acquisition performance data are required
profitability) is significant in the positively performed for the study.
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 10 : Performance of Combined Firms where there are relatively Large and Small Target Firms
Wilcoxon Signed
Ranks Test
ICR1
ICR1
TDR1
TDR1
ICR2-
ICR2-
NWC1
TDR2-
NWC1
TDR2-
NWC2-
NWC2-
ROCE1
ROCE1
RONW1
ROCE2-
RONW1
ROCE2-
CR2-CR1
RONW2-
RONW2-
CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 6 3 3 0 4 6 5 6 2 2 4 5 7 7
Positive Ranks 3 6 6 9 5 3 4 4 8 8 6 5 3 3
Ties 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Mean +Ve 4.83 4.67 3.33 0 5.5 5.17 5.5 5.5 5 2.5 5.5 4.4 6.14 6.29
Rank
-Ve 5.33 5.17 5.83 5 4.6 4.67 5.5 5.5 5.63 6.25 5.5 6.6 4 3.67
Sum of +Ve 29 14 10 0 22 31 33 33 10 5 22 22 43 44
Ranks
-Ve 16 31 35 45 23 14 22 22 45 50 33 33 12 11
Test Statistics Z - - - - - - - -
-0.77(^) 1.01(#) 1.48(#) -2.67(#) -0.059(#) -1.01(^) -.178(#) 0.56(^) 1.78 -2.29 0.56(#) 0.56(#) 1.58(^) 1.68(^)
(#) (#)
Asymp. Sig. (2-tailed) 0.441 0.314 0.139 0.008 0.953 0.314 0.859 0.58 0.07 0.02 0.58 0.58 0.12 0.09
Notes: The symbols used in this table as well as subsequent tables:
^: Based on Positive Ranks (Post-Acquisition Performance > Pre- Acquisition Performance)
#:Based on Negative Ranks (Post- Acquisition Performance < Pre-Acquisition Performance)
27
28
Table 11: Performance of Large and Small Size Companies (Combined Firms)
• Only long term performance measures are traditional performance measures it is found that the
considered. Short term returns as a result of acquirer who has taken over relatively larger companies
announcements of M&A (event studies) are not compared to their size has performed negatively. There is
considered. Long year is defined as three years only. no difference in performance if the companies are
segregated into related and unrelated acquisitions. Both
• Multiple acquisitions (same company making more
have negative returns in the post acquisition period.
than one acquisition deals within the sample period)
Larger the size of acquirer company, larger the loss to
are not excluded from sample keeping in view the
their shareholder as they earn negative returns. It may be
sample size.
the fact that larger firms made larger acquisitions which
Summary and Concluding Remarks earned them larger losses.
This study attempted to evaluate the post acquisition Scope of Further Study
performance of manufacturing companies in India using
The study can be applied in the merger cases in
both traditional performance measures of corporate
manufacturing sector. Study can be made on the pre and
performance. Although the results are subject to
post acquisition in non manufacturing companies. Apart
limitations noted above, this is an important study in
from the liquidity, solvency and profitability other
academic literature in Indian M&A context given the
performance parameters like cash flows can be used to
significance of acquisitions in Indian companies in
know the performance of companies gone for M&A
recent years. There is mixed results of companies’
strategy.
performance in post acquisition period. Using the
Notes:
All the financial parameters are followed by 1 after the abbreviation if those are related to pre-acquisition and likewise
followed by 2 if those are related to post-acquisition.
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 12: Performance of Large and Small Size Companies (Combined Firms)
Wilcoxon Signed
Ranks Test
ICR1
ICR1
TDR1
TDR1
ICR2-
ICR2-
NWC1
TDR2-
NWC1
TDR2-
NWC2-
NWC2-
ROCE1
ROCE1
RONW1
ROCE2-
RONW1
ROCE2-
CR2CR1
RONW2-
RONW2-
CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 7 2 2 1 6 7 8 6 3 3 3 4 8 6
Positive Ranks 3 8 8 9 4 3 2 5 8 8 8 7 3 5
Total 10 10 10 10 10 10 10 11 11 11 11 11 11 11
Mean +Ve 5.57 4.5 5 1 4.33 6.71 6.25 5.83 5.67 3 5.67 7 5.88 5.17
Rank
-Ve 5.33 5.75 5.63 6 7.25 2.67 2.5 6.2 6.13 7.13 6.13 5.43 6.33 7
Sum of +Ve 39 9 10 1 26 47 50 35 17 9 17 28 47 31
Ranks
-Ve 16 46 45 54 29 8 5 31 49 57 49 38 19 35
Test Statistics Z - - - - - - - - - - - - - -
1.17(^) 1.89(#) 1.78(#) 2.70(#) 0.15(#) 1.99(^) 2.29(^) 0.18(^) 1.42(#) 2.13(#) 1.42(#) 0.44(#) 1.24(^) 0.18(#)
Asymp. Sig. (2-tailed) 0.241 0.059 0.074 0.007 0.878 0.047 0.022 0.859 0.155 0.033 0.155 0.657 0.213
Notes: The symbols used in this table as well as subsequent tables:
^: Based on Positive Ranks (Post-Acquisition Performance > Pre- Acquisition Performance)
#:Based on Negative Ranks (Post- Acquisition Performance < Pre-Acquisition Performance)
29
30
Paired Samples
Test Mean t Sig. (2-tailed) Mean t Sig. (2-tailed)
Acquisition of Technology Firms, Paper Presented at Chakrabarti, R. (2008). Do Indian Acquisitions add
AlliedAcademies International Value?, Money and Finance ICRA
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 14: Post Acquisition Performance according to Type of Deal
Wilcoxon Signed
Ranks Test
ICR1
ICR1
TDR1
TDR1
ICR2-
ICR2-
NWC1
TDR2-
NWC1
TDR2-
NWC2-
NWC2-
ROCE1
ROCE1
RONW1
ROCE2-
RONW1
ROCE2-
CR2CR1
RONW2-
RONW2-
CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 7 4 2 1 7 9 9 6 1 3 3 3 5 5
Positive Ranks 2 5 7 8 2 0 0 6 11 9 8 9 6 7
Total 9 9 9 9 9 9 9 12 12 12 12 12 12 12
Mean +Ve 5.14 5 4.00 6.00 4.29 5.00 5.00 5.67 5.00 3.83 4.83 5.33 6.4 6
Rank
-Ve 4.50 5 5.29 4.88 7.5 0 0 7.33 6.64 7.39 6.44 6.89 5.67 6.86
Test Statistics Z - - - - - - - - - - - - - -
1.60(#) 0.30(^) 1.72(^) 1.96(^) 0.89(^) 2.67(^) 2.67(^) 0.39(#) 2.67(#) 2.16(#) 1.65(#) 1.81(#) 0.09(#) 0.71(#)
Asymp. Sig. (2-tailed) 0.11 0.767 0.086 0.051 0.374 0.008 0.008 0.695 0.008 0.031 0.1 0.071 0.929 0.48
Notes: The symbols used in this table as well as subsequent tables:
^: Based on Positive Ranks (Post-Acquisition Performance > Pre- Acquisition Performance)
#:Based on Negative Ranks (Post- Acquisition Performance < Pre-Acquisition Performance)
31
32
Acquisitions?, Journal of Corporate Finance, 7(2), 151- Kumar, S., and Bansal, L.K. (2008). The Impact of
178. Mergers andAcquisitions on
Gregory, A. (2005). The Long Run Abnormal Corporate Performance in India, Management Decision,
Performance of UKAcquirers and the Free 46(10), 1531-1543.
Cash Flow Hypothesis, Journal of Business Finance & Kyriazis, D. (2010). The Long-Term Post Acquisition
Accounting, 32(5-6), 777-814. Performance of GreekAcquiring
Ismail, T.H, Abdou, A.A. and Annis, R.M. (2011).
Review of Literature Linking
Firms, International Research Journal of Finance and
Corporate Performance to Mergers and Acquisitions, Economics, 43, 69-79.
The Review of Financial and Accounting Studies, 1, 89-
104. Leeth J. D., and Borg J. R. (2000). The Impact of
Takeovers on Shareholder's Wealth during the 1920s
Jakobsen, J.B and Voetmann, T.B. (2003). Post- Merger Wave, Journal of Financial and Quantitative
Acquisition Performance in the Short and Long Run- Analysis, 35(2), 217-238.
Evidence from the Copenhagen Stock Exchange 1993-
1997, The European Journal of Finance, 9, 323-342.
Leeth, J.D., and Borg, J. R. (2004). The Impact of
Mergers onAcquiring Firm
Katsuhiko, I. and Noriyuki, D. (1983). The Performances
of Merging Firms in Japanese
Shareholder Wealth: The 1905-1930 Experience,
Ernpirica, 21, 221-244.
Manufacturing Industry: 1964-75’, The Journal of
Industrial Economics, 31 (3), 257-266.
Loderer, C., and Martin, K. (1992). Post Acquisition
Performance of Acquiring Firms, Financial
Kithinji, A.M., and Waweru, N.M. (2007). Merger Management, 21, 69-79.
Restructuring and Financial
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
33
This paper examines the short run and long run inter linkages of the Indian stock market with those of Advanced
emerging markets viz. Brazil, Hungary, Taiwan, Mexico, Poland and South Africa using daily data for the period 1
January 1992 to 31st December 2009. Using Johansen co-integration test and Granger’s causality test we find that
the short run and long run inter linkages of the Indian stock market with these markets has increased over the study
period. Unidirectional causality is found in most cases. The findings have important implications for policy
regulations and investment decision making.
Key Words: Stock Market Inter linkages, Financial Integration, Market Efficiency, Portfolio Diversification,
Investment Decision, Johansen Co integration test.
1
Department of Commerce, Delhi School of Economics, University of Delhi, INDIA. (E-mail : vanitatripathi1@yahoo.co.in)
2
Research Scholar, Department of Commerce, Delhi School of Economics, University of Delhi, INDIA. (E-mail : shrutisethi0906@gmail.com)
35
long run basis started happening at an exuberantly large those areas, resulting into plethora of literature. Broadly,
scale. Stock markets are one of the mediums through the research in this area can be divided into three
which this capital movement occurs. Such capital flows categories. In the first category exist the studies
impact the foreign exchange reserves and the foreign undertaken with the objective of finding the short run and
exchange rates. Changes in the foreign exchange rates the long run inter linkages, whereas, others focus on
bring about the change in the trade competitiveness and empirically exemplifying the plausible reasons behind
trade relations leading to a change in the balance of the inter linkages (discussed above). The third category
payment position of an economy. All these are important caters to analyzing the impact of some important events
aspects that need consideration for the policy making. In (e.g. OPEC oil crisis, South East Asian crisis, etc) on the
addition to the above highlighted points, the level of inter linkages between the markets considered.
stock market inter linkage with others is an important In the first category, some studies are undertaken to
determinant of the contagion effect that an economy will check the inter linkages between the developed markets,
face from the rest of the world. If the stock market of an whereas others focus on finding the relationship among
economy is highly linked with the other markets then the stock markets of a particular region (e.g. Asian
there is a fear of high contagion effect of the happenings region, American region, etc). United States of America,
in the rest of the world through the stock market route. considered the dominant and most influential economy
The knowledge of this area of finance can equip the of the world also occupies a dominant position in the
policy makers to take better decisions. research. Many studies focus on analyzing the impact of
Another critical area is efficiency of the markets. If the US stock market on the others or on a region as a group.
markets are found to be integrated then the speed with Literature also exists in the area of emerging markets.
which the innovations in one market are absorbed by the The Indian stock market too has been analyzed by
other determines the informational efficiency of the researchers (Lamba (2004), Mukherjee and Mishra
market. Eun and Shim (1989), found that the dynamic (2005, 2007), Bose and Mukherjee (2006), Wong,
response pattern of the stock markets is consistent with Agarwal and Du (2005), Siddiqui (2009)) in the recent
the notion of informational efficiency. years. The inter linkages has been checked with many
Many researchers have attempted to ascertain the reasons stocks markets of both developed and the developing
behind the inter linkages among the stock market. nations. Mixed evidences have been found. The present
According to Janakiramanan and Lamba (1998), the study is undertaken to analyze the inter linkage of the
presence of a dominant economy, geographical and Indian stock market with that of the advanced emerging
economic proximity, common investor group and markets (Brazil, Hungary, Taiwan, Mexico, Poland and
multiple stock listings could be the probable reasons South Africa) over the period of 17 years (January 1992
behind stock market inter linkages. Pretorius (2002) to December 2009). The study also looks into the
divides the reasons behind stock market integration into changes in the inter linkages that have occurred over
three: contagion effect (a part of stock market co period of the study. Limited research exists where the
movement that cannot be explained by the economic relationship of Indian stock market is examined in
fundamentals), economic integration (trade relationships relation to the selected emerging markets. Thus, it
and co movement of economic indicators that impact the contributes to the existing literature.
stock returns) and stock market characteristics (market The economies in the world presently can be divided into
size, volatility and industry similarity). Out of multiple four categories on the basis of their development status –
variables empirically examined as reasons behind the developed, emerging, developing and underdeveloped
inter linkages of the stock market by various researchers, economies. The term emerging market recently has
bilateral trade and time trend were found significant by gained popularity. It was first coined by IFC
most researchers [Pretorius (2002), Mukherjee and (International Finance Corporation) to refer to a narrow
Mishra (2007) and Johnson and Soenen (2003)]. range of middle to high income economies among the
The research in this field started in 1960s. Grubel (1968), developing economies where the securities could be
Agmon (1972) and Hilliard (1979) are some of the earlier bought.
studies which focused on finding the relationship This term has been defined differently by different
between the then developed markets using the basic organizations. Some of the common characteristics of
techniques. As more stock markets started emerging, these economies are described here. They are those
research using new techniques too started spreading in
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
36
economies that are on the path of development and yet section introduces the study. Section II presents a brief
not reached the status of developed markets. They have overview of the existing literature in this area of research.
undertaken the path of liberalization and are still in Research objectives are given in section III while data
process of opening up their economies and making them and methodology used in the study is enumerated in
market oriented. The reform process is still going on at a section IV followed by the empirical results in section V.
rapid pace so as to attract the much needed foreign capital The last section summarizes and concludes the study.
for their development. They have huge population with II Literature Review
immense untapped large resources, high growth
potential, increasing involvement in world trade and Eun and Shim (1989) investigated the transmission of
influential presence in their respective regions. They stock market movements among nine largest stock
offer tremendous opportunities in trade and investment markets of the world (in terms of capitalization value in
(FDI and FII). They still face immense challenges (each 1985) viz. Australia, Canada, France, Germany, Hong
emerging market has its own challenge), for example, Kong, Japan, Switzerland, the United Kingdom, and the
poverty, large income gaps, corruption, etc. They offer United States. Multilateral interactions of significant
very high return but are also considered as high risk amount among the stock markets were observed. On an
markets. average 26 percent of the error variance of a national
stock market was attributed to collective innovations in
The growth rates of these economies are much higher the foreign stock markets. Intra regional factor was seen
than that of the developed world taken together. to be operative as the intra regional pair wise correlations
According to the International Business Report 2010 by were found higher than the inter region correlations
Grant Thorton, the emerging markets are the ones that are (U.S.-Canada and Germany – Switzerland exhibited
leading the way to recovery from the recent crisis. They high correlation whereas Canada – Japan and France –
are not only less hit; they are recovering at a faster pace Hong Kong showed near zero correlation).
than anticipated. The IMF’s January 2010 World Contemporaneous correlation of U.S. with other markets
Economic Outlook forecasts that emerging economies (except U.K.) was low suggesting that U.S. influences
will grow by six per cent this year, accelerating to 6.3 per the other markets and not the other way round (this
cent in 2011. By contrast, mature economies are forecast because the U.S. markets open after all other markets on
to grow by 2.1 per cent in 2010 and by 2.4 per cent next the same calendar day). It was also discovered that
year. Given the kind of influence they have on the world innovations in the US stock market are rapidly
economy, their say in the world forums is also increasing. transmitted to other stock markets in an identifiable
A lot of research has gone into the various aspects of the pattern.All respond to the shock most dramatically on the
emerging economies. This study is an attempt to take into first day i.e. with a lag of one day (except U.K. and
consideration the stock market of these economies. To Canada which react the same day) and the after that the
study the inter linkages of the stock market of the responses narrow down. The speed with which the
particular economy it is important that the stock market is transmission happens from the US market to others
developed enough to ensure the reliability of the results. indicates that the informational efficiency of the
To make sure of this important aspect, FTSE Group’s (the international stock markets.
pioneer index company) country classification 2009 is Agmon (1972) found that in their second sub period
used for selecting the economies. They classify emerging (1961-66) share price movements in Germany were the
markets according to a transparent rules-based process closest to U.S. stock market. U.K. and Japan were found
that monitors markets status against fifteen defined to have a similar type of relation with U.S. during this
Quality of Markets criteria. The FTSE Group has divided period. In the first period (1955-61) the relationship
the emerging markets into advanced emerging and between Germany and U.S. and Japan and U.S. was
secondary emerging countries based on the development found to be weaker. But it was stable between U.K. and
of their market infrastructure for greater granularity. U.S. Therefore the hypothesis that the four countries can
As per 2009 country classification, India is classified as a be treated as one single multinational equity market was
secondary emerging market. There are six advanced accepted. Similar behavior of the share prices of Japan
emerging markets, namely, Brazil, Hungary, Taiwan, and U.K. was observed and it was attributed to the
Mexico, Poland and SouthAfrica. possibility that they can be taken as specializing
This paper is divided into six sections. The present industries within one market (specialization in producing
low beta securities). It was also concluded that the non
U.S. markets responded within one period to the price stock markets of India and USA which was attributed to
changes in the U.S. market index. the strong economic and financial ties among these
Pretorius (2002) reported that bilateral trade, industrial markets. Unidirectional causality is observed in all
production growth differentials and the regional effect cases. UK and USA stock markets were found to Granger
(stock markets in same region are more correlated than cause Indian stock market implying that the
the stock markets in different regions) were found to be developments in the USA and the UK are transmitted to
significant by both the cross sectional and the time series the Indian stock market. Further, the Indian stock market
regression models in explaining the correlation is found to lead the Japanese and Chinese stock market.
coefficients among the emerging stock markets. In The study concluded that portfolio diversification
addition to above, a dummy to reflect the 1998 crisis was benefits exist as no long run equilibrium relationship is
found significant by the time series regression. The found among the markets.
variables not found significant were dropped from the III: Research Objectives
model. The model formulated was instrumental in This study has been undertaken to cater to the following
explaining Forty Percent of the variation in the objectives:
correlation coefficients.
(I) To find whether Indian stock market is
Click and Plummer (2005) found that there is only one interlinked with those of advanced emerging
co integrating vector regardless of data frequency, markets in the long run.
currency denomination and lag length. Secondly, all the
markets participate in the integration and none can be (ii) To find the changes if any, in the long run inter
excluded. Four common trends among the five variables linkages of Indian stock market with those of the
still remain implying that integration is not yet complete. advanced emerging markets over the period of
They are integrated in economic sense. The integration is the study.
strong to the extent that the exchange rate is not able to (iii) To determine the short term relationship between
impact it. the Indian stock market and the stock markets of
Kearney and Lucey (2004) examined three approaches advanced emerging markets.
to define the international market integration – (iv) To find the changes if any, that have occurred in
equalization of the rates of returns, international capital the nature of short term relationship between the
market completeness and sourcing the domestic Indian stock market and the stock markets of
investment. The first approach is the direct approach advanced emerging markets.
based on the law of one price according to which the
IV: Data and Research Methodology
financial assets having the same risk characteristic
should command similar return under the condition of Daily closing index values of the leading indices of the
unrestricted international capital flows. It has been countries under consideration (India, Brazil, Hungary,
mostly checked by using covered interest parity, Taiwan, Mexico, Poland and South Africa) are taken for
uncovered interest parity and real interest parity the period of study i.e. 1st January 1992 to 31st
conditions. The other two are indirect approaches. To December 2009. The study period starts with 1992 as that
measure the equity market integration there are three was the time the liberalization reforms were initiated in
ways – firstly through international CAPM, secondly by India and in other countries as well the process initiated
using correlation and co integration and the last relates to around the same period2 Table 1 gives the details of the
the time varying measures of integration. markets analyzed and the indices selected.
Tripathi and Sethi (2010) examined the integration of While selecting the indices for the analysis as far as
the Indian stock market with those of three developed possible the all share indices are avoided as they are less
economies viz. United States of America, Japan and The liquid and do not reflect the real picture. However, the
United Kingdom and the emerging economy of China data availability was given precedence over the
over the period of 10 years (1st January 1998 to 31st composition of the index. Finally out of the seven
October 2008). Positive and significant correlation was indices, only two indices namely, WIG and TAIEX are all
observed between the Indian stock market and the others share indices. The data for South Africa was available
studied. It was highly correlated with USA and least with since July 1995. The data for the advanced emerging
Japan. Weak long run integration was found between the markets have been extracted from www.bloomberg.com
2
Except in case of South Africa where it started in 1994. The data for South Africa has been taken since July 1995.
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
38
and for India www.nseindia.com is used. The log of the any, in the relationship between these markets have
index series was taken so as to iron out the fluctuations in occurred over 17 years (1992 to 2009):
the data. The return series was derived from the log of (i) Period I: 1992 – 1997
indices.
(ii) Period II : 1998- 2003
To accomplish the objectives of the study correlation
analysis, Granger Causality test and Johansen co (iii) Period III: 2004-2009
integration test are employed. The study period is divided Therefore, all the tests are applied on the total time period
into three time periods so as to determine the change if and the sub periods.
3. Taiwan Asia Taiwan Stock Exchange (TWSE) TWSE TAIEX Index TAIEX
6. South Africa Africa Johannesburg Stock Exchange FTSE/ JSE Top 40 Index JSE FTSE
To analyze a time series, it is important to check for (1988) use nonparametric statistical method to consider
stationary properties. Granger’s causality test can be the serial correlation in the error terms without adding
applied for a stationary time series only. A time series is lagged difference terms. The results of the PP test are
said to be (weakly) stationary if its mean and variance are similar to those of the ADF test (except BOVESPA was
constant over time and the value of the covariance found non stationary by PP test at level in time period I by
between the two (2) time periods depends only on the PP test). As the series are found to be integrated of order
distance or gap or lag between the two (2) time periods one (except BOVESPA as mentioned earlier), Granger
and not the actual time at which the covariance is causality test can be applied to the stock return series
computed (Gujrati & Sangeetha, 2007). (which is stationary).
To check whether the index series is stationary, the unit Granger causality test is a test of precedence using which
root tests, Augmented Dickey Fuller (ADF) Test and the it can be examined whether a time series is preceding
Phillip Perron (PP) Test, are applied. Random walk another one i.e. whether the past values of an
model with intercept and random walk model with independent time series are influencing the present
intercept and trend were checked and the most values of the dependent series.
appropriate model was selected. Optimal number of lags A time series Xt Granger-causes another time series Yt if
was selected using SIC. All the series are found to be
the later can be predicted with better accuracy by using
integrated of order 1 [I (1)] except BOVESPA that was
past values of Xt rather than by not doing so, other
found to be stationary at level for the total time period and
information being identical. Testing causal relations
time period 1. Therefore, it has been excluded from
between two stationary series ΔXt and ΔYt can be based
analysis for the said time periods. Phillips and Perron
on the following two equations:
The test is employed on the stationary series which is the V: Empirical findings
stock return series. For determining the optimal number
of lags, the lag length criteria of VAR (found under the This section is divided into following six subsections
views of VAR in Eviews 6.0) was used. On the basis the each of them discussing the results of different tests:
SIC the lags were selected. In all cases lag one was (i) Descriptive Statistics
selected (i.e. one day in the present study). This implies
(ii) Graphical Exposition
that the test checked whether today’s return in the stock
market Y is preceded by previous day’s return of X stock (iii) CorrelationAnalysis
market. The results are checked at 1%, 5% and 10% level (iv) Unit Root Test Results
of significance.
(v) Granger Causality Results
VAR-based co integration tests using the methodology
developed in Johansen (1991, 1995) are used. (vi) Co integration Results
Consider a VAR of order : In each of the subsection the results are divided on the
basis of time period:
yt = A1yt-1+···+Apyt–p + Bxt+εt (3)
• Total Time Period (1st January 1992 to 31st
where yt is a k-vector of non-stationary I(1) variables, xt December 2009)
is a d-vector of deterministic variables, and εt is a vector • Time Period 1 (1st January 1992 -31st
of innovations. This VAR can be written as, December 1997)
p-1 • Time Period 2 (1st January 1998- 31st
Δyt = Пyt -1+ Σ φk PtΔyt-1 + Bαt + ---------------(4) (4) December 2003)
k=1 • Time Period 3 (1st January 2004- 31st
December 2009)
Where:
(I) Descriptive Statistics
p p Before going on to the main findings of the study, the
П = Σ Ai–I1 Pi = – Σ Aj summary statistics of the return series are presented.
i=1 j=i+1 Tables 2 to 5 show the mean, median, standard deviation,
skewness and kurtosis of the daily return series for the
Granger's representation theorem asserts that if the various time periods.
coefficient matrix П has reduced rank r k, then there
Positive daily returns are observed in all the countries
exist k x r matrices α and β each with rank r such that П
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
40
across all the time periods. The highest mean returns are
yielded in the Taiwan’s stock market in all periods except
(ii) Graphical Exposition correlated with South African stock market with r =
A graphical representation of the indices over the period 0.947, closely followed by Mexico. It is least correlated
of study is given in Figure1. It can be seen that there is an with that of Taiwan (r = .464). In the middle lie Poland,
upsurge in the all the indices starting around July 2003. Hungary and Brazil.
All the indices seem to be falling during the sub prime During first sub period (1992-97) positive and significant
crisis period. A co movement in the index series can be correlation is found with all the Advanced Emerging
observed in the last sub period hinting towards increasing Markets. It is most correlated with Taiwan (r = 0.644)
linkages over the period of the study. followed by Brazil, Poland, Mexico and Hungary. It is
Figure 1: Movement of Stock Indices (1st January least correlated with that of South Africa. During
1992 to 31st December 2009) second sub period ( 1998-2003) too, the Indian stock
market is significantly and positively correlated with all
BOVESPA WIG
BUX JSEFTSE
the Advanced Emerging Markets. The correlation
TAIEX NIFTY coefficients are higher in comparison to the first time
60000.00 INMEX
period. High correlation is found with Brazil and
Poland. It is equally correlated with Mexico and Hungary
with the r = 0.645. It is least correlated with South Africa
40000.00
as found in the earlier time period as well.
Value
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
42
JSE FTSE -2.151753 -2.084853 -1.636531 -1.842389 -1.603421 -1.549546 -1.674948 -1.685738
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
44
JSE FTSE -33.91923* -55.80905* -13.48698* -25.56606* -33.54679* -33.53888* -37.33749* -37.62471*
* Significant at 1%
Notes: ADF – Augmented Dickey Fuller test statistic, PP – Phillip Perron test statistic
Null Hypothesis: the series is non stationary
(v) Granger Causality Test Results However in the second sub period unidirectional
This test shows the short term relationship of precedence precedence is observed in all cases expect with Poland
among variables. It is applied on the stationary series. In where no relationship was found. Indian returns were
the present study it is the daily return series. This found to be preceded by Brazilian, Mexican, Hungarian
changes the variable that is being interpreted i.e. the and South African returns. The Indian stock returns
returns. Optimal number of lag was selected using SIC unidirectionally precede Taiwan’s stock returns.
and in all cases it was found to be Lag 1 (implying one While in the last sub period unidirectional relationship
day). This implies that the results display whether the was found in all cases except between the Indian and the
previous day returns of X stock market are influencing Hungarian returns where both of them found to be
today’s return in the stock market under consideration. impacting each other. The Indian stock returns were
The results are checked till 10% level of significance. discovered to have weaker impact on the Hungarian
As shown in Table 5 for the Total Period, no relationship stock returns as it is significant at 10%. In addition to the
was found between the Indian and the Hungarian returns. returns which were preceding the Indian returns in the
Same holds true for Poland as well. Unidirectional previous period, the Poland returns too were found to be
causality was found between three pairs. Both the preceding Indian returns which were not the case in the
Mexican and the South African returns were discovered earlier time periods. Indian returns as in the earlier time
to precede the returns in the Indian stock market. On the period were found to be preceding the returns of Taiwan’s
other hand, Indian returns were observed to be preceding stock market. Similar causality results were reported by
the returns in Taiwan’s stock market. Siddiqui (2009) in context of Indian and Taiwan’s return
for the period June 2004 to June 2009.
During first sub period no relationship of precedence was
found with Taiwan and the Poland. Mexican (significant
at 1%), Hungarian (significant at 5%) and South African
returns (significant at 10%) were discovered to be
preceding Indian returns. This implies that the Indian
returns are being impacted by the previous day’s returns
of the earlier mentioned countries.
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
46
Overall it can be said that there are short term linkages of long term equilibrium relationship among the
with these markets have been increasing over the period variables under consideration. Pairwise test is used
of study. Indian stock returns were found to be impacted wherein; each of the Advanced Emerging Markets is
by the previous day stock returns of South Africa and tested with the Indian stock market. The test is applied on
Mexico in all the time periods. Indian stock returns were the non stationary series which is the log of index series
observed to precede the Taiwan’s stock returns in all the in the present case. The results are presented time period
time periods except the first. Relationship with Poland wise in the following subsections:
was found to be established only in the last time period. As shown in Table 6, during the total study period ,co
(vi) Co integration Test Results integration was found only in one case. One co
This section enumerates the results of the Johansen co integrating equation was found between India and
integration test. This test is applied to check the existence Poland by both the trace test and the Eigenvalue test
indicating towards long term relationship among the two
markets. No co integration was found with the other with these markets. No long term relationship was found
Advanced Emerging Markets. with Hungary, Taiwan and Poland. In June 2003, India –
During the period 1992-1997 Indian stock market is not Brazil-South Africa (IBSA) Dialogue Forum, was set up
found to be co integrated with any of the Advanced as a coordinating mechanism to promote cooperation and
Emerging Markets in this period. The first time period consensus on issues of trade, poverty alleviation,
being the period when all these stock markets were in the intellectual property rights, social development,
initial stage of their development and opening up, also agriculture, climate change, culture, defense, education,
being the period of lesser developed technology and energy, health-care, information society, science and
slower information transmission, the results stand technology, peaceful nuclear energy, tourism and
justified. Similar results are found in the period 1998- transport between these three emerging economies
2003. No long term relationship is found with any of the belonging to different continents of the world. Since then
Advanced Emerging Markets. The same results are it has been actively engaged in multitude activities and
obtained by both the trace test and maximum eigen value summits to further the cause. The consequences of this
test. forum along with the other measures taken in the
direction of building close economic ties could be reason
However in the last sub period ( 2004-2009) Indian stock behind the increased inter linkages of Indian stock
market is found to be integrated with three Advanced market with those of Brazil and South Africa in the last
Emerging Markets viz. Brazil, Mexico and South Africa. time period. Since 2005, a lot of bilateral agreements are
These results are in line with that of the correlation results signed with Mexico.
which displayed very high correlation in the last period
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
48
It can be concluded from the cointegration test results that as these economies are growing and opening up to the world
the inter linkages among them have increased. The plausible reasons behind these results could be the liberalization
policies adopted by these countries, rapid information transmission, common investor group, rapid economic growth
and the increasing bilateral trade relations. [Pretorious (2002), Mukherjee and Mishra (2007) and Johnson and Soenen
(2002) found bilateral trade relations to be one of the major factors behind increasing inter linkages beside the other
factors].
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
50
United States, United Kingdom, Germany and Japan, Kearney C. and Lucey B.M. (2004), International equity
The Journal of Finance, 27 (4), 839-855. market integration: Theory, evidence and implications,
International Review of Financial Analysis, 13, 571–
583.
Bose, S. and P. Mukherjee (2006), A Study of
Interlinkages Between the Indian Stock Market and
Some Other Emerging and Developed Markets. Indian Koop G. (2008), Introduction to Econometrics, John
Institute of Capital Markets 9th Capital Markets Wiley & Sons Ltd., First Edition.
Conference Paper.
Retrieved from SSRN: http://ssrn.com/abstract=876397 Lamba A.S. (2004), An Analysis of the dynamic
relationships between South Asian and Developed
Click R.W., and Plummer M.G. (2005), Stock market Equity Markets, NSE research initiative, paper 83.
integration in ASEAN after the Asian financial crisis, http://nseindia.com/content/research/comppaper_lat83.
Journal ofAsian Economics, 16, 5 – 28. pdf
Eun, C., and S. Shim (1989), International Transmission Markowitz, H. (1952). Portfolio selection. Journal of
of Stock Market Movements, Journal of Financial and Finance, 7, 77- 91.
QuantitativeAnalysis, 24, 241 – 256.
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Asia-Pacific Finance and Accounting Review
Vol. I, No. 1, October - December 2012
pp. 52-66, ISSN: 2278-1838
www.asiapacific.edu/far
Key Words: Corporate Governance, Corporate Disclosure, Disclosure Index, Firm Characteristics
Professor, Department of Business Management, Saurashtra University, Rajkot, Gujarat, INDIA. (E-mail: sanjaybhayani@yahoo.com)
53
changes, companies listed on stock exchange have been Barret, M.E. (1977). , Zareski, M. (1996), and
forced to disclose the minimum information in their Camfferman, K. & Cooke, T.(2002).
annual reports as set out by the statutory requirements. It is worth noting that the essence of the quality of
However, particularly large and publicly traded leading disclosure (dependent variable) is not firmly defined. For
companies have gone beyond those minimum instance, Buzby, S.L. (1974) applied the term adequacy,
requirements. Reporting information voluntarily has Barret, M.E. (1977). and Wallace, R. S. O. & Naser, K.
become a norm for large companies. Companies compete (1995), used the term of comprehensiveness and Patton,
with an extensive amount of business information J. & Zelenka, I. (1997), used the term of extent.
voluntarily to establish competitive advantage in the
capital market. The disclosure of information is Furthermore, the number and type of firm characteristics
dependent on the characteristics of the firm. The study is (independent variable) vary among studies. A consistent
an attempt to assess empirically the extent of corporate finding is that size is an important predictor of corporate
disclosure practices and influence of firm characteristics. reporting behaviour. Most researchers in this area found a
close relationship between size and the extent of
With this end in view, the rest of the sections are disclosure Singhvi, S.S., & Desai, H.B. (1971), Kahl, A.
organized as follows: Section 2 presents the review of & Belkaoui A. (1981), Cooke, T. E. (1989), Cooke, T. E.
literature; Section 3 provides objectives of the study; (1992), Ahmed, K., & Nicholls, D. (1994)., Hossain, M.,
Section 4 describes the methodology of the study and Tan, L.M., Adams, M., (1994), Wallace, R. S. O., Naser,
development of hypotheses; Section 5 finds out the K., & Mora, A. (1994), Craig, R. & Diga, J. (1998),
results of the study; and Section 6 summarizes the Narasimhan and Vijayalakshmi (2006), Mahajan and
findings and draws a conclusion. Chander (2007), Mahajan and Chander (2008), Despina
2. EXTANT LITERATURE et. al. (2011), However, Ahmed, K., & Nicholls, D.
The section reviews some of the studies on the extent of (1994); Archambault, J.J., & Archambault, M.E. (2003),
corporate disclosure henceforth conducted since early and Akhtaruddin, M. (2005), did not find a relationship
1960 in the various countries of world. Since 1960s between size and level of disclosure.
various researcher has tried to study the corporate With the exception of size, findings concerning
disclosure practices. Among them are Cerf, A.R. (1961) association between company characteristics and
measured disclosure by an index of 31 information items corporate disclosure practices are mixed. Singhvi,
and concluded that financial reporting practices of many S.S.(1968), and Wallace, R. S. O., Naser, K., & Mora, A.
US companies need improvement. Several researchers (1994), Sehgal, Bhalla & Bhalla (2006), Mahajan and
have replicated his methodology. The majority of these Chander (2007), found a significant positive association
studies were applied to developed countries such as the between profitability and the level of corporate
UK Spero, L.L. (1979). , Firth, M. (1979), USA Buzby, disclosures, whereas, Belkaoui, A., & Kahl, A. (1978)
S.L. (1974). Lang, M., & Lundholm, R. (1993). Canada and Wallace, R. S. O. & Naser, K. (1995), Despina et.
Belkaoui, A., & Kahl, A. (1978), Sweden Cooke, T. E. al.(2011), observed a significant negative relationship
(1989), Switzerland Raffournier, B. (1995), Japan between the two variables and some other researchers
Cooke, T. E. (1992), and in Hong Kong Wallace, R. S. find no relationship at all McNally, G.M., Eng, L.H.,
O. & Naser, K. (1995). Hasseldine, C.R. (1982), Sehgal, Bhalla & Bhalla
A smaller group of studies have examined developing (2006), Mahajan and Chander (2008).
countries, such as Egypt Mahmood, A. (1999), Jordan Similarly, Hossain, M., Perera, M.H.B., & Rahman, A.R.
Naser, K., Alkhatib, K. and Karbhari, Y. (2002), Nigeria (1995) and Wallace, R. S. O. & Naser, K. (1995), found a
Wallace, R.S.O. (1987), Bangladesh Ahmed, K., & positive association between leverage and the level of
Nicholls, D. (1994), India Narasimhan and disclosure. Wallace, R. S. O., Naser, K., & Mora, A.
Vijayalakshmi (2006), Sehgal, Bhalla & Bhalla (2006), (1994), and Bradbury, M.E. (1992), Mahajan and
Mahajan and Chander (2007), Mahajan and Chander Chander (2007), Mahajan and Chander (2008), found no
(2008), Greece Despina et. al. (2011), Zimbabwe significant association between leverage and the extent
Owusu-Ansah, S. (1998), Bangaladesh Rahaman, M. of voluntary disclosure.
Mizanur (1999). Also, some studies have adopted a The results of the study Sehgal, Bhalla & Bhalla (2006),
comparative approach to assess the intensity of Mahajan and Chander (2007), Mahajan and Chander
disclosure across two or more countries, for example (2008), Despina et. al. (2011), have not found any
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
54
significance relation with age of the firm and level of disclosure requirements for these companies are
corporate disclosure. specialized & regulated by other regulatory authority.
Findings concerning relationship between auditing type Total 45 firms, including, Pharmaceutical, FMCG sector,
and the level of corporate disclosure are not consistent. Cement, Steel & Fertilizers, Automobile & others were
Singhvi, S.S., & Desai, H.B. (1971), Mahajan and selected. Annual reports of the firms were collected from
Chander (2007), Mahajan and Chander (2008), corporate offices of the companies and from the web sites
confirmed this hypothesis, but Firth, M. (1979), and of the firms.
Wallace, R. S. O., Naser, K., & Mora, A. (1994) did not 4.2 Computation of Index
report any relation. The annual report of firms were studied and differences
Association between the level of disclosure and industry were observed in the levels of information disclosed,
types provides mixed evidence. Cooke, T. E. (1989) which provided an important base for identifying the
findings report that manufacturing companies disclose items of the disclosure index. In order to improve the
more information than other types of companies. business reporting, several committees and studies were
Mahajan and Chander (2008), finds that software, It, undertaken all over the world like, The AICPA special
Media and telecommunication industry disclose more committee report and FASB steering committee report.
information than other industry. But the findings of These have also influenced the selection of the items in
Inchausti,B. (1997), Owusu-Ansah, S. (1998), and the index. Disclosure list used in the study by Meek et al.
Despina et. al. (2011), provide no evidence of this (1995) was also used extensively in this study. In all 74
association. items were included in the disclosure index.
Additionally, prior studies Owusu-Ansah, S. (1998), Items listed in the index are disclosed in the various
Wallace, R. S. O. & Naser, K. (1995), define mandatory sections of the annual report such as the director’s report,
disclosure as the presentation of a minimum amount of MDA and sections before the financial statements or
information required by laws, stock exchanges and the even in the chairman’s speech. Part of this information is
accounting standards setting body of facilitate evaluation also kept available through other sources of
of securities. communication by the companies and from sources such
Akhtaruddin, M. (2005), investigated the mandatory as the industry reports and communication through the
disclosure by 94 listed companies in Bangladesh and press. Certain information is required to be filed with the
found that companies, on average, disclose 44% of the registrar of companies. However, for this study, only the
items of information, which leads to the conclusion that annual reports are considered because of their general
prevailing regulations are ineffective monitors of nature as comprehensive documents and any user of the
disclosure compliance by companies. reports must get all the information about the firm in one
document.
Similarly, the present study concentrates on corporate
disclosure practices of Indian firm and influence of the The disclosure index is developed using the information
firm characteristics on it. listed in disclosure checklist. The content of the annual
report were examined & the scoring for the voluntary
3. OBJECTIVES OFTHE STUDY disclosure is done in the form of 1 & 0. If the disclosure
The primary objectives of the study is to assess the level item is present, then a score of (1) is given & if the item is
of corporate disclosure of listed firm in India and to not present then a score of (0) is entered as a score. The
measure empirically the association between firm entire annual report was scrutinized carefully before
characteristics and corporate disclosure levels of listed giving an item 0 or 1. The scores for each company were
firm in India. then aggregated. The voluntary disclosure index for each
of the companies was computed as Total Voluntary
4 .METHODOLOGY OFTHE STUDY:
Disclosures Divided by Maximum Voluntary
4.1 Sample selection: Disclosures. The disclosure index of the sample firm
The sample for the study was collected from the NSE 50 developed for the year ended 31st March, 2008 to 31st
Index, reason behind selection of NSE 50 index was that March, 2010 of the sample firm.
includes the major sector firms of India. So sample can be 4.3 Model Development:
considered as representative sample. From this sample,
In the present study to examine the impact of
banking & finance companies were eliminated as the
Disclosure Score = β0 + β1AGE + β2LIST+ β3OWNER + β4LEV + β5AUDIT + β6RS + β7SIZE + β8PROFIT + €
Where
OWNER = Ownership Structure of the Firm
LEV = Leverage of the Firm
AUDIT = Size of theAudit Firm
RS = Residential Status of the Firm
SIZE = Size of the Firm
PROFIT = Profitability of the Firm
AGE = Age of the Firm
LIST = Listing Status of the Firm
β = Slopes of the independent variables
β0 = Constant
€ = The error term
4.4 Definition and Estimation of Variables: incentives to voluntarily disclose information to meet the
The corporate disclosure literature suggests several needs of undispersed shareholders groups. In Australia,
attributes that influence the voluntary disclosure made by McKinnon and Dalimunthe (1993) note that companies
the firms. These factors are discussed below:- with a single ownership structure disclose more
voluntary information. Hossain et al. (1994) suggested a
4.4.1 Ownership structure negative association between management ownership
Ownership structure is another mechanism that aligns the structure and the level of voluntary disclosure by
interest of shareholders and manager. The functioning of Malaysian listed firms. In addition, Hongxia, Li &
the firm is highly dependent on the ownership structure. Ainian, Qi (2008) shown that higher managerial
According to the agency theory there is a separation of ownership have high level of voluntary disclosures. Eng
ownership and control of a firm, the potential for agency and Mark (2003) reported that lower management
costs arises because of conflicts of interest between ownership and significant government ownership are
contracting parties. It is believed that agency problems associated with higher disclosure among listed firms in
will be higher in the widely held companies because of Singapore. Haniffa and Cooke (2002) indicate that the
the diverse interests between contracting parties. By extent of family control in a firm is negatively associated
utilizing voluntary disclosure, managers provide more with the amount of voluntary disclosure. Their evidence
information to signal that they work in the best interests suggests that family controlled firms do not require
of shareholders. additional information because the owner managers
could access the information easily, thus leading to low
In this study, ownership structure is proxied by
agency costs and low information irregularity. The
management ownership. Using agency theory, it is
management entrenchment hypothesis could also
argued that firms with higher management of ownership
explain the negative association and its effects could
structure may disclose less information to shareholders
negate the positive effects of the agency cost
through voluntary disclosure. It is because the
explanations. The significant role of management
determined ownership structure provides firms lower
ownership in influencing voluntary disclosures practices
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
56
of firms from the prior researcher. So it is expected that 4.4.4 Residential Status of a Firm:
ownership structure will influence the voluntary Subsidiaries of multinational companies operating in
disclosure information. developing countries are expected to disclose more
The hypothesis is formally stated as: information and observe higher standards of reporting
The management ownership has a negative for a number of reasons: Firstly, they have to comply with
association with disclosure score. regulations of not only their host country but also the
parent company where substantially higher standards of
4.4.2 Leverage reporting and accounting are maintained. Secondly, they
According to agency theory higher monitoring costs are usually equipped with more advanced accounting
would be incurred by firms that are highly leveraged. To software tools, efficient audit staff, competent and
reduce these costs, firms are expected to disclose more efficient management and staff, and so on, have the
information i.e. the relationship between leverage and potential to disclose more information without any
the extent of disclosure is expected to be positive (Jensen incremental processing costs. Thirdly, they are under
and Meckling, 1976). Signaling theory on the other hand closer scrutiny of various political and pressure groups
provides contradicting explanations to the direction of with in the host country that view them as sources of
relationship between disclosure and leverage: Ross economic exploitation and agents of imperialist power
(1997) suggests that markets interpret increased leverage (Ahmed and Nicholls, 1994). Hence, they have an
as a signal of firm’s superior quality, but Myers and incentive to disclose more information in order to avert
Majluf (1984) argue that increased leverage is a signal of any pressure for excessive control for exploitation.
below-expected cash flow. Most empirical studies have Ahmed and Nicholls (1994) used multinational company
found inconclusive results and only a few annual report influence as an explanatory variable in developing their
studies have supported positive association. The models and the latter found it to be the most significant
hypothesis of the study is as below. variable explaining disclosure levels. Therefore, the
following hypothesis has been formulated and tested in
The leverage of the firm has a positive association
this study.
with disclosure score.
The residential status of the firm has a positive
4.4.3 Size of theAudit Firm:
association with disclosure score.
It is expected that large audit firms will be more
The influence of residential status is operationalized by
concerned about their clients’ quality and amount of
means of dummy variable, with 1 for multinational
reporting in the annual reports. Any financial statement
companies and 0 for domestic companies.
certified by any big four audit firm must be more credible
than that of non-big four firms. Ahmed and Karim (2005) 4.4.5 Size of the Firm:
found that companies audited by big four audit firms One of the important variables taken in many disclosure
comply more with reporting requirements than that of studies is the size. From the various researches it is found
others. For our study we expect to have a positive that size of firm does affect the level of disclosure of
relationship between corporate governance disclosure companies. Generally large firms disclose more
and big four affiliation. information as they may have low cost for generating the
The hypothesis for the study is: information and companies may tend to allocate larger
resources for production of his information. New. D., et
The size of the audit firm has a positive association
al., (1998) ˇ Ahmed & John,(1999)ˇ Adams, C. A., et al.,
with disclosure score.
(1998) Barako et al. (2006) investigated that the larger
In the present study size of the audit firm of the sample the firm, the more likely they will make voluntary
firm were divided into big four firm and small firms disclosures. Based on the study done world wide, for
(other than the Big four). If the audit of the firm is done by example (Aripin, N., et al., (2008), Watson et al., (2002)ˇ
Ford, Rhodes, Parks & Co., Deloitte, Haskins & Sells, DaSilva & Christensen, (2004), Wallace et al., (1994)ˇ
Price Waterhouse & Co. and Lovelock & Lewes audit Samir, M. et al.,(2003)ˇ Ho and Wong, 2001)ˇ they
firm it consider as big four and other wise small firm. In suggested the underlying reasons why larger firms
this study this variable used as dummy. The firm being disclose more information. The reasons proposed are that
audited by big four audit firm was assigned 1 and others managers of larger companies are more likely to realize
0. the possible benefits of better disclosure and small
companies are more likely to feel that full disclosure of possibility that old firms might have improved their
information could endanger their competitive position. financial reporting practices over time Alsaeed, K.
Thus, the impact of firm size is expected to be positively (2006), and secondly they try to enhance their reputation
associated with the extent of social responsibility and image in the market Akhtaruddin, M. (2005).
disclosures. Barako, D.G., (2006)ˇ Hossain et al., (2006) Owusu-Ansah, S. (1998), states that the competition
suggested that firm’s size does not affect the level of argument proposes that young companies are not likely
corporate voluntary disclosure. In this study, market to disclose full information about their financial results
capitalization, total sales and total assets will be used as and position, because this may prove to be detrimental if
the measures of firm size. The following specific sensitive information is disclosed to the established
hypotheses have been tested regarding size of the firm: competitors.
The size of the firm has a positive association with The resulted hypothesis is:
disclosure score The age of the firm has a positive association with
4.4.6 Profitability disclosure score.
There is a general proposition that a company's 4.4.8 Listing Status of a Firm:
willingness to disclose information is positively related The listing status of a firm also influences the disclosure
to its profitability. Managers are motivated to disclosure level of that firm. Every Indian company listed on Indian
more detailed information to support the continuance of stock exchange has to comply with its listing agreement.
their positions and remuneration and to signal The companies whose shares are actively traded have
institutional confidence. Apostolos, K. et al., (2009)ˇ always been scrutinized sharply by the market as a whole
Karim, A.K.M.W., (1996)ˇ Simir, M., (2003)ˇ Meek, et and investors in particular. Empirical evidence also
al. (1995) suggests that profitability of the companies is suggests a significance association between disclosure
expected to disclose more information about their level and the listing status of a firm (Singhavi and Desai,
performance. Bujaki and McConomy (2002) show that 1971; Cooke, 1989; Cooke, 1992; Malone et al., 1993;
firm facing a slowdown in revenues tends to increase and Wallace et al., 1994). So, the above discussion led to
their disclosure of corporate governance practices. the formulation and testing of the following hypothesis:
Moreover, firms suffering serious corporate governance
failures tend to provide extensive disclosure of The listing status of a firm has a positive association
governance guideline implemented in the period after with disclosure score.
such failures. Haniffa and Cooke (2002) find a positive The companies trading on stock exchanges in India have
and significant association between the firm’s been categorized as category ‘A’, ‘B1’, ‘B2’, ‘S’, and ‘T’.
profitability and the extent of voluntary disclosure, The impact of listing status of a firm on the extent of
which is consistent with the earlier (Leventis and disclosure level has been examined by introducing a
Weetman, (2004)ˇ Kusumawati, D.N., 2006). Since the dummy variable, with 1 if firm falls under ‘A’ category
studies supporting positive relationship between and 0 otherwise.
profitability and disclosure are conducted in corporate
disclosure field, the hypothesis of this study will be in the
form of positive relationship. In this study, profitability
as measured by return on capital employed (ROCE),
return on net worth (RONW) and return on sales (ROS).
The following specific hypotheses have been tested
regarding profitability of the firm:
The profitability of the firm is positively associated
with disclosure score.
4.4.7Age
In the research of Camfferman, K. & Cooke, T. (2002),
they have identified a number of new variables, such as
the age of the company to be investigated by future
studies. The rationale for selecting this variable lies in the
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
58
5. EMPIRICAL RESULTS:
5.1 Sample Statistics
The results of descriptive statistics presents in Table–1. 5.2 Pearson Correlation analysis
The results from the disclosure index indicate (DIS) that Table-2 presents the result of the Pearson correlation
the level of average voluntary disclosure in the sample coefficients of the continuous explanatory variables as
firms is 53.21% the highest score achieved by a firm is well as the dependent variable included in the study. The
75% and the lowest score is 15% with a standard result of Pearson correlation exposed that listing status of
deviation of 0.0921. So the firms are widely distributed a firm and return on sales are positively related with
with regard to corporate disclosure. The mean age of the voluntary disclosure (P<0.05, Two- tailed), but
firm is 27 years with standard deviation of 22.123. residential status of a firm is negatively related with
Ownership structure proportion mean is 42.245 with disclosure score (P<0.05, Two- tailed). Ownership
minimum of 5% to 99%. The average leverage of the firm structure, market capitalization, sales, total assets, and
is 1.83 with standard deviation of 1.78. Minimum and return on capital employed are positively related with
maximum value of market capitalization is 6.5 and 13.87 voluntary disclosure (P<0.01, Two- tailed). While size of
respectively with mean value of 10.43. The average sales the audit firm is negatively related with disclosure score
value is 9.81 with standard deviation of 2.71. The (P<0.01, Two- tailed).
average total asset is 9.61. The mean value of ROCE,
RONW, and ROS are 17.32, 25.56 and 15.93
respectively.
DIS 1
Age 0.064 1
Total Assets 0.195** 0.171** 0.078 0.362** 0.072 -0.063 -0.07 0.643** 0.496** 1
ROCE 0.183** -0.0331 -0.163* 0.143* -0.168** 0.017 0.231* 0.164** -0.243** -0.113* 1
RONW 0.083 0.041 -0.065 -0.058 -0.134* -0.084 0.231** 0.166** -0.005 -0.186** 0.412** 1
ROS 0.118* 0.007 -0.069 0.362** -0.062 0.032 -0.342** 0.083 -0.093 -0.098 0.336** 0.465** 1
5.3 Multiple RegressionAnalysis 1995ˇ Wallace et all., 1994). The results from the multiple
regression analysis have been presented in Table 3. Three
To measure association between dependent and
separate determinants of firm size sales, total assets, and
independents variables in present study regression
market capitalization) as well as three different
analysis has been run. Regression has been used in much
measures of profitability (ROCE, RONW, and ROS)
previous research (Roef Abur, 2010, Aktaruddin, M. et
were used. Each surrogate to represent size and
al., 2009ˇ Apostolos, K. et al., 2009ˇ Hossain and
profitability was used only once in a model. This led to
Hammami, 2009 HongxiaLi & Ainian Qi, 2008ˇ Lim, S.
the creation of nine regression equations, the results of
et al., 2007ˇ Mahajan and Chander (2007), Barako, D, G.
which have been presented in Table 3.
et al., 2006ˇ Da-Silva and Christensen, 2004ˇ Gerald and
Sidney, 2002ˇ Owusa-Ansah, 1998ˇ Wallace & Naser,
Table 3 reveals that for all nine models of regression and Wong (1987). This is significant with Mahajan and
ownership structure was positively found to be Chander (2007); Hossain and Hammami,(2009),
significant at 1 % level. But audit firm size was Despina et. al. (2011).
negatively found significant in all nine model of ROCE explains more significant variations in corporate
regression at 1% level of significant. This result is similar disclosure index of firm among the profitability
to that of Mahajan and Chander (2007). Listing status of measures. So, it can be concluded that ROCE has a
firm were found significant at 5% level of significant in positive impact on corporate disclosure of the firm. This
equation no. 1,4,5, and 7 where as in equation no. 2,3,6,8, result is similar to that of Hossain and hammami,(2009) ˇ
and 9 it found significant at 10% level. Leverage of the Kusumawati, D.N, (2006)ˇ Leventis and
firm found negatively correlated with corporate Weetman,(2004). On other hand it is found that RONW
disclosure of the firm at 1%, level of significant in and ROS have no any significant impact on disclosure
equation no. 2, 3, 6, 7, 8 and 9, while it found significant level of the firm.
at 5% level in equation no. 1 and 4 and in equation no. 5 it
found significant at 10% level. ROCE was significant at The firm is listed in international stock exchanges and the
1% level when applied in combination with all surrogates firm audited by the big four firm of auditor, disclose more
of size. Other profitability surrogates could not information than others. So, hypotheses are accepted
significantly explain variations in the corporate with both the variables that listing status of firm and audit
disclosure level. Market capitalization was found size of the firm has positive impact on the disclosure level
significant (equation no. 6) at 10% level when append in of the firm.
the combination of ROS. While in equation no. 7 total The leverage of the company has negative significant
assets was found significant at 10% level in the association with disclosure level of the firm. It indicates
combination of ROCE. Sales were found significant in that firms having more debt have policy of disclosing
equation no. 1 with the combination of ROCE. only mandatory information because the Firm discloses
So, out of 9 models, the model, which is satisfying maximum information when they have more share
validity requirements and having improved adjusted R2 capital.
has been chosen and selected as a valid model. Out of 9 The residential status of a firm has negative insignificant
models 2 models were found which satisfying validity association with disclosure of the firm. Form the results it
requirements and having improved adjusted R2. The can be concluded that the Indian firm have to comply
model with combination of Age, listing status, ownership with legal provisions of Indian rules so it disclose more
structure, leverage, audit firm size, residential status, information than foreign firm.
sales, and ROCE (measure of profitability), has 65.4
On the other hand, it is found out that firm age have no
(Adjusted R2), F value is significant at 0.00 level of effect on mandatory disclosure level this results is similar
significance and DW is 2.134. The second model was to the result of Despina et. al.(2011).
with the combination of Age, listing status, ownership
structure, leverage, audit firm size, residential status, 6. CONCLUSION
total assets, and ROCE (measure of profitability), has This research is an extension of previous research where
65.4 (Adjusted R2), F value is significant at 0.00 level of a set of variables is considered to examine their
significance and DW is 2.083. In these two model listing association with the level of corporate disclosure. The
status of firm, ownership structure, leverage, audit firm objective of this study is to examine firm characteristics
size, size of firm (sales and total assets) and ROCE is and their influence on corporate disclosure. These factors
found to be significant. The adjusted R2 values suggest include Age of the Firm, Listing Status of the Firm,
that a significant percentage of the variation in corporate Ownership Structure of the Firm, Leverage of the Firm,
disclosure score can be explained by the variations in the Size of the Audit Firm, Residential Status of the Firm,
whole set of independent variables. It is clear form the Size of the Firm and Profitability of the Firm. In
analysis of regression results that larger the firm size particular, the study aimed to determine which of these
(sales and total assets) disclose more information and it is factors were significantly related to increased corporate
also found significant. So our hypothesis is accepted in disclosure. The study used the disclosure index to
favour of that size of the firm has a positive association measure corporate disclosure on a sample of 45 listed
with disclosure score. The regression results for firm size non financial firm of India. The results of the study
by total assets are insignificant which similar with Chow indicate that the extent of corporate disclosure within the
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
62
sample firm varies within 15% to 75 % (approximately) + Akhtaruddin, M., Hossain, M. A., Hossain, M. &
for the period of study. It implies that though all the firms Yao Lee, “Corporate Governance and Voluntary
disclose mandatory information as required by law, but at Disclosure in Corporate Annual Reports of
the same time, a large number of firms disclose more than Malaysian Listed Firms”, The Journal of Applied
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is influenced by listing status of the firm, ownership
structure, leverage of the firm, size of the audit firm,
+ Alsaeed, K., “The association between firm-specific
size (as measured by total assets, sales and market
characteristics and disclosure: The case of Saudi
capitalization), and profitability (as measured by return
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size, higher profitability, higher leverage, listing in
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This case captures the journey and experience of an Indian company which decided to undertake fianacial business
process re-engineering and subsequent implementation of an enterprise system.It highlights the cost-benefit analysis
involved in the implementation of a enterprise wide information system like that of ERP (Enterprise Resource
Planning) system in an Indian company. To start with, a complete business process reengineering (BPR) has been
carried out to study the existing system and to propose a future recommended business processes to be followed in the
company. A managerial interpretation to the analysis has been given considering the robustness of the system and its
criticality to the organization as a whole since the new system is set to overhaul the financial transaction of the
company. The benefits of the system have been discussed in details.
*The name of the company has been intentionally concealed. The authors acknowledges the valuable
contribution of Shubhi Tripathi in developing the case study.
1
Institute of Management Technology (IMT) Ghaziabad, INDIA. (E-mail: parijat.upadhyay@gmail.com)
2
National Institute of Technology, Durgapur, INDIA. (E-mail: dgp_anupamca@yahoo.com)
68
integrated information. The consequent benefits are the world in major petrochemical products.
elimination of redundant data as well as rationalization of To understand the extent of the high performance level of
the entire processes, which result in substantial cost ABC Ltd. and how it benchmarks its activities against its
savings. The integration among business functions own standard, there are some statistics from the annual
facilitates communication and information sharing, report FY 2011-12. [4] highest ever revenues, record
leading to dramatic gains in productivity and speed.ERP exports ,turnover increased by 31.4 % to Rs 339,792
systems are based on the best practice business crore ($ 66.8 billion), PBDIT decreased by 3% to Rs
processes- the best ways of doing processes. It provides 39,812 crore ($ 7.8 billion),PBT increased by 2% to Rs
the primary tool for guiding efforts towards BPR, so 25,750 crore ($ 5.1 billion),Net profit declined
much so that ERP is often called the electronic marginally by 1% to Rs 20,040 crore ($ 3.9 billion) due to
embodiment of reengineering. higher tax provisions,Exports increased by 41.8% to Rs
The Central Banking Division at Exploration and 208,042 crore ($ 40.9 billion),Record crude throughput
Production (E& P) division of ABC Ltd. wanted to at 67.6 million tonnes and achieved an average GRM of $
undergo this BPR to make the divisional system achieve 8.6/bbl.
improvements in quality and service. The treasury The Exploration and Production business of ABC
procedures of ABC Ltd. (E&P), along with processing Ltd.
of payments require a lot of manual intervention and
effort, administrative delays, paper work and physical India imports about two-thirds of its crude oil
record keeping of invoice and supporting documents. requirement. Exploration and production of oil and gas is
Partial automation of various treasury processes has critical for India's energy security and economic growth.
already been done using the financial module of ERP ABC Ltd.'s oil and gas exploration and production
system. For achieving complete automation, a business business is therefore inexorably linked with the national
process re-engineering is being done by the executives imperative. Exploration and production, the initial link in
for the financial processes, which is an organizational the energy and materials value chain, remains a major
level activity for keeping a common procedure for all growth area and ABC Ltd. envisions evolving as a global
divisional finance departments. energy major. It’s a champion of deepwater oil
exploration. [3].The diverse oil and gas business at ABC
ABC Industries Limited (ABC LTD.) Ltd. can be stated as achievements in the following
The ABC Ltd. Group, is one of the India's largest private points:
sector enterprise, with businesses in the energy and • Acreages across different basins - Unparalleled
materials value chain. Group's annual turnover is in knowledge base [4]
excess of US$ 66 billion. The flagship company, ABC
Ltd. , is a Fortune Global 500 company and is the one of • Partnership with BP across the hydrocarbon chain in
the largest private sector company in India. India
Backward vertical integration has been the cornerstone • A world class infrastructure at KG-D6 with
of the evolution and growth of ABC Ltd. Starting with production contributed to $ 25-30 Billion of oil
textiles in the late seventies, ABC Ltd. pursued a strategy equivalent energy replacement for India
of backward vertical integration - in polyester, fibre • Poised to develop and produce CBM resources
intermediates, plastics, petrochemicals, petroleum
• Investment in US-based shale gas joint ventures
refining and oil and gas exploration and production - to
exceeds $ 3.5 billion
be fully integrated along the materials and energy value
chain.The Group's activities span exploration and • Significant production upside in liquid and wet gas
production of oil and gas,petroleum refining and plays
m a r k e t i n g , p e t r o c h e m i c a l s ( p o l y e s t e r, f i b r e ABC LTD.'s E&Pbusiness: KG Basin
intermediates, plastics and chemicals),textiles ,retail,4G
(4th Generation) network and special economic KG-D6 gas fields completed 1092 days of 100% uptime
zones.[3] and zero-incident production. An average daily gas
production from KG-D6 block for the year was 42.65
ABC Ltd. enjoys global leadership in its businesses, mmscmd with a cumulative production of 1,808 bcf since
being the largest polyester yarn and fibre producer in the inception, of which 551.31 bcf was produced in FY 2011-
world and among the top five to ten producers in the
12. An average oil production for the year from the block that the Performance Bank Guarantees are also renewed
was 15,481 barrels per day with a cumulative production on time.
of 19.44 mmbl of oil and condensate since inception, of Imports Division
which 5.67 mmbl was produced in the current fiscal. In
the D1-D3 gas fields a total of 22 wells have been drilled, The Imports Division is responsible for releasing goods
of which 18 are production wells. Of these, 2 wells have from the customs upon intimation by Treasury Team. It is
been ABC Ltd. this fiscal. 6 wells in the D26 field are also responsible for providing the Treasury with bill of
under production. Of these, MA-2 which was earlier a entry and shipping document, for dispatch to the paying
gas injection well has been converted to a production bank, within six months from the date of remittance.
well since April 2010. An integrated development plan Treasury Team
for all gas discoveries in KG-D6 is being conceptualized.
The Treasury team is responsible for processing of
This will encompass existing wells and other discoveries
vendor payments for both foreign as well as Indian
within the block to maximize capital efficiency and to
vendors. The team’s responsibility begins on receipt of
accelerate monetization. [3]
verified invoices from the Accounts Payable team. The
Finance, Control and Accounting Department Treasury team co-ordinates with Forex Remittance Non
(FC&A) of the E&Pbusiness Trade team and Corporate Taxation Team for forex
The FC&A department is the function of the Exploration booking and tax orders respectively. Treasury team is
and Production commercial business. Here the also responsible for booking of withholding tax liability
concerned department and which is relevant to this on Foreign Service Invoices and for uploading form
project is the divisional Treasury team. It is responsible 15CAand 15CB from income-tax purposes.
for all payment processing. It interacts with the Accounts The main procedures followed by the E&P Treasury at
Payable team and the Central Banking division, ABC Ltd. are as follows:Payment to foreign supply
corporate taxation division, Procurement Team and vendors,payments to Indian vendors,bank
Imports Division. reconciliation,monitoring Bank guarantees of
Roles and Responsibilities vendors,preparation of statements for funding and issue
of letter of credit
Accounts Payable
The Operational Policies of Treasury Team of E&P
Accounts Payable team provides the approved invoice,
documents for receipt of goods and completion of Vendor payments
services, transportation document and the system Vendor payments are processed by the Treasury team and
generated Invoice verification document for processing made through cheques or electronic payment
of payment to the Treasury team. The Accounts Payable mechanism.Every payment voucher is reviewed and
team also provides concurrence on terms and conditions approved by Manager Treasury for correctness and
mentioned on the Letter of Credit request made by the accuracy.All cheques, e-payments and Real Time Gross
procurement team for Issue of Letter of Credit. Settlement (RTGS) transfer letters are to be approved by
Corporate Banking Division (CBD) the authorized signatories as per the Board
Resolution.Bill of Entry for all materials imported is
CBD is responsible for transfer of funds to INR bank submitted to the authorized dealers within six months of
account on the basis of the daily fund requirement made the date of remittance.
by the Treasury team.
Bank Reconciliation
Corporate Taxation Division
Separate bank accounts are maintained for all
This division ensures the availability of tax order and transactions related to different ventures like KGD6 for
Chartered Accountants Certificate (Form 15 CA & CB). both INR and foreign payments.Bank Reconciliation is
Foreign Exchange (Forex) Remittance - Non Trade carried out for both INR and Dollar account on a daily
supports the funding requirement for payment to vendor. basis.
Procurement Bank Guarantee
This team provides terms and conditions on the Letter of Bank Guarantee received from vendors is verified with
Credit request form for its preparation. It also ensures the issuing bank for authenticity.Commercial division’s
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
70
concurrence is taken before acceptance of any Bank (BPR). The main reason for this happening in this
guarantee by the treasury team. company’s division is no different The Central Banking
Funding ofAccounts Division at ABC Ltd. wishes to implement this BPR to
make the divisional system achieve improvements in
Funding of accounts is done on a daily basis by the CBD, quality and service.
on the basis of request made by the Treasury team. Daily
updation of an excel file, known as the Cash Call Sheet is The Business: Exploration and Production
done by the deputy treasury managers for the fund Commercial
requirement of the next day. Exploration and Production commercial business is done
MANAGERIALPROBLEM on the basis of partnership and production sharing as per
the norms and regulations set by the Government of India
There has been much automation at the Central banking in the Production Sharing Contract (PSC) and further
division. And quite a few has been implemented at the defined as operating agreements, practices and
E&P divisional level. The level of automation has not yet procedures in the Joint Operations Agreement (JOA)
reduced manual efforts. with business partners respectively.
Recently, some of the more successful business The take from the entire operations of the business is
corporations in the world seem to have hit upon an depicted in the figure 1 below:
incredible solution: Business Process Reengineering
Figure 1 : The breakup of the take of the government and the contractor from the E&P business
Revenue
Royalty
Cost Petroleum
The business requirement is such that ABC Ltd. being the The Current Practices
Operator of the KG-D6 wells has to deal with the
The financial and accounting practices of the E&P
payments to vendors and suppliers as well as call for the
business follows the Joint Venture Accounting (JVA)
share from partners in the joint venture.
procedure. In this there are dealings done for every
Reserve Bank of India (RBI) does not allow any Indian exploration block and each block has with multiple bank
company to hold foreign currency bank accounts in accounts, for making money transfers in INR and in
India. Every foreign payment has to be further divided foreign currency. Every single invoice that is received for
and paid into Indian currency and foreign currency payment by the treasury, has to be bifurcated to the
payment. Such division of payments further complicates respective bank account for payment as per the payment
the payment procedure. currency, and remittances has to be made as per the
demands of the contract with Indian and foreign vendors. whose customized portions are guaranteed also for new
The compliances and checks are to be maintained with versions is important in this respect.
respects to taxation, Chartered Accountant (CA)
ERP: The Most Important Tool for Business Process
certificates, performance bank guarantee, approvals and
Reengineering
physical record keeping, tracking of foreign exchange
rates and maintenance of cash flow from the central team BPR is the analysis and re-design of workflow within and
to the divisional team and then to the various block bank between enterprises.ERP provides perhaps the primary
accounts. tool for guiding efforts, so much so that ERP is often
called the electronic embodiment of reengineering. ERP
Enterprise Resource Planning: Need and
systems are based on so called best practice business
Significance
processes- the best ways of doing processes.
Today having an ERP is not a luxury, but a necessity’
Financial Excellence through ERP
Having a properly implemented ERP system and a fully
Delivering financial excellence means striking the right
trained workforce that knows how to use system in best
balance between sound stewardship and value creation,
possible way is a must for survival in this brutally
entrepreneurship and caution, and focusing on the big
competitive world. [2] Selecting an ERP System that is
picture versus accuracy in the details. On a practical
best suited for the organization and implementing and
level, the following priorities come to the forefront:
operating it in most efficient manner is a very difficult
task and chances of failure are very high. • Fulfilling the stewardship role through regulatory
compliance and effective risk management
ERP: How
• Adding value by helping your organization
The enterprise has to identify a consulting firm that
outperform stakeholders’ financial expectations– in
possesses all attributes necessary to conduct the
the private sector, generating more profit; in the
implementation project successfully. An ERP project
public sector, achieving more cost-effective
consists of a group of people, the company employees,
outcomes
the implementation consultants, package vendors, the
hardware vendors, the communication experts and so on. • Delivering superior financial services to the
“Success of the project of this magnitude and scope organization at a reduced cost
depends largely on each party playing its role well,
because the roles are singular in nature.” [2] The None of this is easy, considering the stakes and
appropriate architecture, customization features, challenges that have surfaced over the past few years. At
installation procedures and level of complexity that is the same time, the personal consequences of failure can
needed in ERP Solutions will vary depending on the size go beyond the public embarrassment of a late filing or a
and nature of the company. restatement of earnings. When ensuring regulatory
compliance and having effective risk management, there
ERP: Strategy are no financial restatements, minimal revenue at risk
and no fines or penalties due to noncompliance. When
The most important and critical activity the company
there is outperforming of stakeholders’ financial
management is to do is to designate the right people to
expectations, it consistently realized a superior return on
lead the project. These individuals must acquire a
capital employed, high total return to stakeholders (either
reasonable degree of knowledge about the ERP package.
stockholders or the Government) and protected stock
Finally it is the company that should motivate its
price and shareholder value by avoiding erosion of
employees to change and learn new technologies and
capital and when there is delivering of superior service,
prepare them to assume their new responsibilities. The
there will be taking less time to close the books,
company should create an environment where the ERP
continually driving down the cost of finance and
system can grow thrive and produce the dramatic
minimizing the day’s sales outstanding to reduce the
benefits it is capable of. The selection of packages that
amount of working capital required by the business [5]
are constructed so as to enable minimum processes and
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
72
Reengineering: What and Why process falls short of meeting those requirements.
Having identified the customer driven objectives, the
“Reengineering is the fundamental rethinking and
mission or vision statement is formulated. The vision is
radical redesign of business processes to achieve
what a company believes it wants to achieve when it is
dramatic improvements in critical, contemporary
done, and a well-defined vision will sustain a company’s
measures of performance such as cost, quality, and
resolve through the stress of the reengineering process. It
service and speed [3].” The key words in the preceding
can act as the flag around which to rally the troops when
definition are the italicized ones.
the morale begins to sag and it provides the yard stick for
BPR advocates that enterprises go back to the basics and measuring the company’s progress [1, 8].
reexamine their very roots. It doesn’t believe in small
Activity #2: Map and Analyze As-Is Process:
improvements. Rather it aims at total reinvention. As for
results: BPR is clearly not for companies who want a Before the reengineering team can proceed to redesign
10% improvement. It is for the ones that need a ten-fold the process, they should understand the existing process.
increase. According to Hammer and Champy [1], the last The important aspect of BPR (what makes BPR, BPR) is
but the most important of the four key words is the word- that the improvement should provide dramatic results.
‘process’. BPR focuses on processes and not on tasks, The main objective of this phase is to identify
jobs or people. It endeavors to redesign the strategic and disconnects (anything that prevents the process from
value added processes that transcend organizational achieving desired results and in particular information
boundaries. [6] The BPR aims at total reinvention. Hence transfer between organizations or people) and value
it is for companies who want ten-fold increase in the adding processes [8]. This is initiated by first creation
improvement process. BPR focuses on processes and not and documentation of Activity and Process models
on tasks, jobs or people. It endeavors to redesign the making use of the various modeling methods available.
strategic and value added processes that transcend Then, the amount of time that each activity takes and the
organizational boundaries. [6] cost that each activity requires in terms of resources is
calculated through simulation and activity based costing
The Process of Re-engineering
(ABC). All the groundwork required having been
Activity #1: Prepare for Re-engineering: completed; the processes that need to be reengineered are
identified.
This activity begins with the development of executive
consensus on the importance of reengineering and the Activity #3: Design To-Be process:
link between breakthrough business goals and
The objective of this phase is to produce one or more
reengineering projects. A mandate for change is
alternatives to the current situation, which satisfy the
produced and a cross-functional team is established with
strategic goals of the enterprise. The first step in this
a game plan for the process of reengineering. While
phase is benchmarking. “Benchmarking is the
forming the cross functional team, steps should be taken
comparing of both the performance of the organization’s
to ensure that the organization continues to function in
processes and the way those processes are conducted
the absence of several key players [7]. As typical BPR
with those relevant peer organizations to obtain ideas for
projects involve cross-functional cooperation and
improvement [9].” The peer organizations need not be
significant changes to the status quo, the planning for
competitors or even from the same industry. Innovative
organizational changes is difficult to conduct without
practices can be adopted from anywhere, no matter what
strategic direction from the top. The impact of the
their source. Having identified the potential
environmental changes that serve as the impetus for the
improvements to the existing processes, the development
reengineering effort must also be considered in
of the To-Be models is done using the various modeling
establishing guidelines for the reengineering project.
methods available, bearing in mind the principles of
Another important factor to be considered while
process design. Then, similar to the As-Is model, we
establishing the strategic goals for the reengineering
perform simulation and ABC to analyze factors like the
effort is to make it your first priority to understand the
time and cost involved. It should be noted that this
expectations of your customers and where your existing
activity is an iterative process and cannot be done part in the success of every reengineering effort lies in
overnight. The several To-Be models that are finally improving the reengineered process continuously. The
arrived at are validated. By performing Trade off first step in this activity is monitoring. Two things have to
Analysis the best possible To-Be scenarios are selected be monitored – the progress of action and the results. The
for implementation. [6] progress of action is measured by seeing how much more
informed the people feel, how much more commitment
Activity #4: Implement Reengineered Process:
the management shows and how well the change teams
The implementation stage is where reengineering efforts are accepted in the broader perspective of the
meet the most resistance and hence it is by far the most organization. This can be achieved by conducting
difficult one [10]. The question that confronts us would attitude surveys and discrete ‘fireside chats’ with those
be,’ If BPR promises such breath taking results then why initially not directly involved with the change. As for
wasn’t it adopted much earlier?’One could expect to face monitoring the results, the monitoring should include
all kinds of opposition - from blatantly hostile such measures as employee attitudes, customer
antagonists to passive adversaries: all of them perceptions, supplier responsiveness etc [13].
determined to kill the effort. When so much time and Communication is strengthened throughout the
effort is spent on analyzing the current processes, organization, ongoing measurement is initiated, team
redesigning them and planning the migration, it would reviewing of performance against clearly defined targets
indeed be prudent to run a culture change program is done and a feedback loop is set up wherein the process
simultaneously with all the planning and preparation. is remapped, reanalyzed and redesigned. Thereby
This would enable the organization to undergo a much continuous improvement of performance is ensured
more facile transition. But whatever may be the juncture through a performance tracking system and application
in time that the culture change program may be initiated, of problem solving skills. Continuous improvement
it should be rooted in our minds that “winning the hearts (TQM) and BPR have always been considered mutually
and minds of everyone involved in the BPR effort is most exclusive to each other. But on the contrary, if performed
vital for the success of the effort” [11]. Once this has been simultaneously they would complement each other
done, the next step is to develop a transition plan from the wonderfully well. In fact TQM can be used as a tool to
As-Is to the redesigned process. This plan must align the handle the various problems encountered during the BPR
organizational structure, information systems, and the effort and to continuously improve the process. In
business policies and procedures with the redesigned corporations that have not adopted the TQM culture as
processes. “Rapid implementation of the information yet, application of TQM to the newly designed processes
system that is required to support a reengineered business should be undertaken as a part of the reengineering effort
process is critical to the success of the BPR project. [9].
Additional requirements for the construction of the To-
Be components can be added and the result organized
into a Work Breakdown Structure (WBS). Recent
developments in BPR software technologies enable
automatic migration of these WBS activity/relationships
into a process modeling environment. The benefit here is
that we can now define the causal and time sequential
relationships between the activities plan [12].” Using
prototyping and simulation techniques, the transition
plan is validated and its pilot versions are designed and
demonstrated. Training programs for the workers are
initiated and the plan is executed in full scale [6].
Activity #5: Improve Process Continuously:
A process cannot be reengineered overnight. A very vital
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
74
START
No
Is PAN available?
Yes No
No Corporate taxation
Is tax order available?
cell advice available?
Yes
Check for CA
Yes certificates
Send letter to bank for transfer of funds from INR to NOSTRO Account
PRV closure
END
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
76
Flowchart Description: Before “As-is” Automation • Thereafter a tax advice for the specific payment for
Scenario for the process of Payments to Foreign the vendor is made which is prepared by the team
Vendors treasury itself
The boxes in grey highlight the treasury (internal) • The amount to be paid to the vendor in foreign
operational points of manual intervention that can be currency is to booked 2 days prior to the payment date
done away post the automation. As identified by the is to be intimated to the central banking division
CBD, these will be done away with as shown in the (CBD) through an excel sheet input
flowchart of “To-be” (after automation) scenario. • A payment requisite voucher (PRV) entry is proposed
• The Treasury team receives invoices and supporting in SAP manually by the executive which is a mode of
documents from the Accounts Payable team for informing the CBD that the PRV specific invoice is
payment processing. The documents have been open for payment and requires payment through
scanned to the SAP and all the information regarding foreign currency
the document number and posting date are already • The payment entries are passed in ERP. This involves
punched into the system clearing the ledger entries specific to the vendor in
• There is a payment “Due Date” which is generally 30 ERP corresponding to the PRV #
days after the receipt of invoice from the vendor • Along with this A1/A2 sheet is also prepared side by
• The next step for the Treasury after receiving the side in an excel sheet. The A1/A2 sheets are the
invoices is to perform three checks for the vendor and compiled version and services respectively including
its: the details of Invoice, Bill of Entry/Lading details
o Performance Bank Guarantee (PBG) • The covering letter is also prepared manually for
o PermanentAccount Number (PAN) every payment made. This is a letter to the bank
o Tax Order which asks it to withdraw the payment amount from
the specified bank account and transfer funds into the
• Manual checks in the system are done for the NOSTRO account through SWIFT payment mode.
availability of these three supporting documents and The bank account contains the forex converted
associated numbers. In case the first two are missing currency as requested and transferred by the CBD on
then the invoice is sent back to the Accounts Payable the date of payment
to make the documents available from the vendor. In
case tax order is not available the corporate taxation • The entire set of documents is sent to the authorized
cell’s advice is asked for and a requisite of a CA signatories and then sent to banks for payment
certificate is checked for approval and one set is kept as a hard copy for records
• Any Indian company which requires forwarding a • When the bank confirms the payment, it sends
payment to a foreign vendor is expected to inform the payment advice in the electronic form which is
Government of India (GOI) about the tax deductions. forwarded to the vendor and hence the PRV is
Either a vendor prepares it (tax order) or ABC Ltd. manually closed by the Treasury executive
prepares it on behalf of vendor (15CB). It is required • It can be seen that one foreign payment takes
that a 15CA and a tax order(if sent by vendor itself) is approximately 12 days for payment by Treasury. In
required or a combination of 15CA and 15CB is a general the payment process cycle for one invoice,
requisite for tax compliances as mandated by the GoI the period for which the invoice stays with the
for foreign payments treasury can be shown in the table below:
Table 1 : Breakdown of time spent by a foreign payment invoice in the E&P treasury
Activity No. Days required Event
1 1 Scrolling and calculation of tax
2 1 Passing of tax liabilities
3 1 CA certificates generation
4 7 Clearance from taxation cell
5 2 Booking of Foreign currency and its clearance via CBD
Total days 12
Flowchart Description: After “To-be” Automation and other practices that come under the Banking
Scenario for the process of Payments to Foreign Communication Measures (BCM), as the SAP will
Vendors be doing that automatically and providing the alert
• The scenario expected to be present after the to theAccounts Payable team in case of any default
automation process, is projected to reduce the • The process of PRV generation and its closure which
workload to only the administrative supervisory was a manual punching process into the SAP will
effort of checking the presence of bank guarantee also be automated hence saving time. Other steps
and PAN for the vendor and tax memo generation continue to prevail as is
Figure 3 : Flowchart “To-be” The Process of Payments to Foreign Vendors
START
No
Corporate
taxation cell
advice available?
Yes
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
78
Send letter to bank for transfer of funds from INR to NOSTRO Account
END
The Process of Payments to Indian Vendors scanned to the ERP software and all the information
The payment process is almost fully automated which regarding the document number and posting date are
has reduced the manual work to almost the supervisory already punched into the system
checks and passing correct entries in the system and • The tax deduction entries are already passed by The
check for coordination and compliance with the banks. Accounts Payable team and hence no entry is to be
The boxes in grey highlight the treasury internal manually punched by the Treasury team. The process
operational points of manual intervention that can be of payment entry is started in ERP software in which
done away with automation. As identified by the CBD, as per the amount and the frequency of vendor the
these will be done away with as shown in the flowchart of mode of payment is decided.
“To-be” after automation scenario. • If e-payment is greater than 0.2 million then the
The flowchart and the description of the before and after RTGS method is used and if it is less than 0.2 million
scenario have been discussed below: then NEFT is used as the mode. If payment is for
Flowchart Description: Before “As-is” Automation administrative purposes or any one time vendor with
Scenario for the process of Payments to Indian whom no future transaction is foreseen, then a
Vendors cheque is used.As per the mode the similar entries are
passed in SAP a “G” for RTGS and “I” for NEFT is
• The Treasury team receives invoices and supporting entered or a manual cheque entry is passed in ERP
documents from the accounts payable team for Software.
payment processing. The documents have been
• The entire set of documents is sent to the authorized • The tax advice is manually updated by the executive
signatory and then sent to banks for payment in the NSDL website to meet the compliances
approval and one set is kept as a hard copy for records Flowchart Description: After “To-be” Automation
• The payments passing processes are made in batches Scenario for the process of Payments to Indian
in and they are given batch numbers. After a Vendors
proposal is made in ERP software, these files are • The payment process is fully automated expect for
encrypted by ERP software and then vouchers are the times when a special case of manual/one time
uploaded via telnet the payments are posted to bank payments or when the Indian vendor expects
site. Once posted the signatory has to confirm the payment in foreign currency.
payment online on the bank website. One is the
approval and the other is confirmation by the • There is no scope of further automation that can
signatory reduce the cycle time for normal cases, only there is
scope of improvement in the cases are there where
• There is a system generated payment advice which is special cases as mentioned above.
forwarded to the vendor either through ERP software
or manually using e-mail
START
Team treasury receives invoice and supporting documents from Accounts payable Team
Yes
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
80
END
START
Team treasury receives invoice and supporting documents from Accounts payable Team
Yes
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
82
END
Cost Benefit Analysis Model for ABC Ltd. (E&P) the overtime the executive had to perform for the task.
Treasury Also in the alternate scenario it also signifies idle time the
The proposed model begins with the input as the total employee is having redundant in his office hours, which
number of transactions that the E&P treasury gets. Then can be utilized in some other activity. Hence it also shows
the percentage of transactions for foreign vendors and the effect on the administrative lifestyle and an
Indian vendors are identified.The model assumes items, improvement that automation provides.
mentioned in the notes and assumption section, due to the Since the payment process for Indian vendors is almost
confidentiality clause stated by ABC Ltd. The Work fully automated and the process is almost fully efficient
Structuring is for the two scenario are stated as Before with the automation so here we consider the impact of the
andAfter automation include the following details for the payment process for foreign payments on the time aspect
total time for the internal processes which include and hence the manpower aspect.
execution as well as supervisory time from the The following table shows the time wise breakup of the
executives. activities for foreign payment process and also identifies
The model identifies that the time consumed in the “As- the activity as internal/external to the Treasury. This data
Is” and “To-be” scenario has a drastic reduction post has been the basis of the Cost BenefitAnalysis model.
automation and how the man-days required are reduced To start with the Cost-Benefit Analysis, break-down of
and hence manpower/executive can be utilized for some activities for foreign payments process has been given in
other process and hence a diversion of executives to the table below:
more productive work can take place.The value after the
decimal digits for the man power required figures signify
Table 2 : Activity Breakdown for foreign payments process of ABC LTD. (E&P) Treasury
Work Structuring
BEFORE AUTOMATION SCENARIO Time Hrs. Year 1 Year 2 Year 3 Year 4
Total Time for internal processes per invoice
for supplies
A1 (Considering 37 min (32 min for preparation 0:37 266 342 604 959
+5 min for supervision))
Total Time for internal processes per invoice
for services
A2 (Considering 21 min (16 min for preparation 0:21 124 159 280 445
+5 min for supervision))
A3 Grand Total for time required (A1+A2) 390 501 884 1,404
Total Man Days Required for Only Materials 41 53 93 147
B1 Invoices (A1/6.5)
Total Man Days Required for Only Services 19 24 43 68
B2 Invoices (A2/6.5)
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
84
Interpretation 2 of Cost BenefitAnalysis Model: the system and how well the system can manage the
Another scenario that can be seen is how the same varying workload. 40000 invoices can be processed by
number of invoices can be processed in the manpower approx 1.94 manpower post automation. In current
required. A variation can be seen that if work is reduced scenario, approximately 11.58 manpower is required to
down with the same workload how it can affect the handle it. A comparison between the scenario before and
manpower. This is just a way to justify the robustness of after the Automation (as per Interpretation 2) has been
given in the table below:
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
86
Budget Model for ERPAutomation of E&PTreasury analysis model. The yearly manpower cost and
The model states how the budget utilization can be done overheads are calculated for each scenario and hence the
in both the “As-is” and “To-be” processes, the scenario savings are stated.The initial and operating expenses for
before automation and after automation, taking into automation are also included, also the tax savings on
account how the outflow of cash in both scenarios can be depreciation included.The Net Present Value is also
utilized.This model will help to later justify the taken into account for the computation of discounted
hypothesis stated in the research problem statement will cash flow for both scenario is calculated followed by
form the foundation pillar for the managerial Internal Rate of Return estimated
interpretation.The numerical figure for manpower Budget module for ERP automation is given below:
required is taken, as calculated, from the cost benefit
Discounted Cash Flow for (A) 1,815,000 1,650,000 3,000,000 4,090,909 10,555,909
Discounted Cash Flow for (B) 9,880,000 (131,818) (119,835) 345,605 9,973,952
dam across a particular river. You can do one or the other, Sons Inc, New York.
but not both. There are several ways to address to the 9. Manganelli, Raymond.L., Klein, Mark.M., (1994),
issue of increasing work efficiency of the division. The The Reengineering Handbook: A Step-By-Step
solution involved here is not mutually-exclusive, both Guide To Business Transformation., American
scenario involves automation, one scenario in lesser ManagementAssociation, New York.
percent and the latter in higher percent. It is expected to
go with an investment that has the highest net present
value at a discount rate appropriate to the company. The 10. Furey, Timothy.R., (1993), A Six Step Guide To
concern has been that discount rate can change with Process Reengineering., Planning Review 21 (2),
economic condition, a case not considered in the model 20-23
described above. The investment with higher net present
value over a broad range should be selected.The projects
with no big late/ cleanup costs, the better projects will 11. Obolensky, Nick., (1994)., Practical Business
have higher internal rate of return, this is what can be Reengineering., Gulf Publishing Company,
assessed here. Houston.
5. Defining Financial Excellence Through SAP, SAP 15. Demetres, Andrews (2007), Project Management
Financial Tutorials Institute Westchester, Dueling Methodologies:
Challenges to the Program Management Office.
6. Business Process Reengineering: A Consolidated
Methodology Subramanian Muthu, Larry Whitman,
And S. Hossein Cheraghi Dept. Of Industrial And
Manufacturing Engineering Wichita State
University, USA
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
88
Book Review
The business of water is the ‘third largest’ in the world only after oil & gas and electricity. In this comprehensive book on
water, the author who is a water investment expert and founder of the private investment company called WaterTech
explores the link between the water ecology, regulation and economics apart from identifying specific investment
opportunities in water universe.
Around 39 billion cubic kilometer of water covers 75% of the planet’s surface, out of which only 3% is fresh water.
According to WHO (World Health Organization), 1.1 billion people do not have access to clean drinking water. Around
40% of the world’s population resides in areas without adequate sanitation, which explains why 50% of the hospital beds
are filled with patients suffering from water related diseases. In future as water becomes even scarcer commodity, the
government around the globe will invest huge amount on water infrastructure. The OECD (Organization for Economic
Cooperation and Development) estimates that its member countries along with BRIC (Brazil, Russia, India and China)
countries will spend $ 15 trillion on these processes.
The investing community divides the water industry into companies that provide potable drinking water, those with
waste water treatment infrastructure and those that test and analyze water. The Palisades Water Index tracks these water
companies.
Traditionally municipal and private water utilities were engaged in supplying water to public. Nowadays many of these
utilities are publicly held and for some of these companies, the investment results have exceeded the returns of major
stock indices. This trend started in US in the year 1999, when Vivendi acquired US Filter. Investors in these types of
companies will bear technological risk, interest rate risk, regulatory risk etc. However companies with proven
technologies will deliver above average returns in this sector.
The waste water treatment infrastructure consists of pumping stations, storage, sanitary and storm sewers. The most
common issues posing challenges before these systems are deterioration in pipes, which result in leaks and
contamination. This segment will present new investment opportunities particularly in emerging pumping technology.
These advanced category pumping units (including self actuating, controller-less pneumatics) are also useful in landfills.
Testing and analyzing water is a $21 billion business globally. These processes are becoming extremely critical because
of new regulations and cost control measures. Water utilities have started using automatic meter reading (AMR) to
monitor and control consumption and to raise accurate billings. Denver Water installed 2,20,200 meters, each with a
miniature radio transmitter to convey data. An US General Accounting Office study found that 29% of drinking water
utilities and 41% of waste water utilities were not recovering their costs from user payments. This shortfall, combined
along with the requirement of more infrastructural spending persuades water and waste water utilities to implement
better system monitoring controls that rely on sophisticated data management and geographic information method.
Desalinization treatment removes dissolved minerals and solids from water primarily through distillation, reverse
osmosis and membrane technologies. Globally around 14000 desalinization plants are active mostly in Saudi Arabia and
Spain.
Environmentalists and water resource experts agree that future generations must continue to have access to drinkable
water. Translating that goal into water policy, current practices focus on preserving the quality of watersheds and
protecting them from contamination. The watershed management requires comprehensive strategy and companies in
engineering and consulting, design, hydraulic modeling, construction and environment restoration can benefit by
contributing to this cause.
Overall the water industry is comprised of many companies and functions. Increasing demand will lead to significant
consolidation accompanies by mergers and acquisitions, Initial Public Offerings (IPOs) and Private Equity (PE)
investments. Investors therefore can buy stocks in companies in all aspects of water industry as well as Exchange Traded
Fund (ETF) based on water indices. These ETFs are based on Palisades Water Indexes, S&P Global Water Index and ISE
Water Index.Around 16 mutual funds, private equity funds and hedge funds focus on the global water industry.
Malhar Majumder
Director
Glise Consulting Pvt. Ltd.
E-mail : malhar@gliese.co.in
Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
90
Submission details :
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To submit your credible work please do visits http://www.asiapecific.edu/far or forward your research work with the
duly filled copyright transfer forms to abanerjee@asiapacific.edu
N. M. Leepsa
Doctoral Student
Vinod Gupta School of Management, IIT Kharagpur
E-mail: leepsa@vgsom.iitkgp.ernet.in
Abstract
Mergers and acquisitions (M&A) are the inorganic growth strategies which have
got its significance in today’s corporate world due to intensely competitive business
environment. The present paper intends to study the trend in merger and acquisition
(M&A) particularly with reference to manufacturing companies. While M&A is considered
as one of the strategies for growth, the companies are expected to perform post M&A so
that those are proved successful. From the literature review it is found that there is no
conclusive evidence about the impact of M&A on corporate performance. Moreover in
recent period M&A deals have gone up manifold and regulations relevant for M&A have
also undergone change. Hence there is a need to look into the trend of M&A and the post
M&A performance of companies. The present study is an attempt to find out the difference
in post merger performance compared with pre merger in terms of profitability, liquidity
and solvency. The scope of the study is limited to manufacturing sector companies in India.
The statistical tools used are descriptive statistics, paired sample t-test.
1. Introduction
Today, the business environment is rapidly changing with respect to competition, products, people,
markets, customers and technology. It is not enough for the companies to keep pace with these changes
but is expected to beat competitors and innovate in order to continuously maximize shareholder value.
Growth is inevitable for the companies to keep pace with the changes. Growth strategy is divided into
two types viz. organic and inorganic. Mergers and acquisitions (M&A) are the inorganic growth
strategies for achieving accelerated and consistent growth. It has gained importance throughout the
world in the current scenario due to globalization, liberalization, technological developments and
intensely competitive business environment. The increased competition in the global market has
prompted the Indian companies to go for mergers and acquisitions as a significant strategic alternative
to survive and grow.
International Research Journal of Finance and Economics - Issue 83 (2012) 7
The total number of acquisitions from 1st April 1999 to 30th November 2010 is 9,228, highest
being 1,160 in 2007. The total number of merger deals is 3,454, highest being 415 in 2006. The lowest
consideration amount is `15,925.28 crore and highest is `2, 09,247.97 crore, total amount being ` 9,
58,147.28 crore. M&A is prevalent in all the sectors but compared to other sectors the manufacturing
sector has the highest number of M&A deals. Manufacturing industries accounted for the most of
M&A deals in these years with 40% share out of total.
2. Previous Research
Study of both Indian and International research papers are made on the works relating to post merger
corporate financial performance. As surveyed through literature most of the work has been done in
USA & UK apart from Malaysia, Japan, Australia, Greece, Canada, Taiwan, Thailand and India. But
few works are done with respect to India. Many studies have been made on the effects of mergers and
acquisitions on share prices, shareholder wealth, and the pre and post merger operating and financial
performance of the target and bidder firms. There is no conclusive evidence whether M&A enhances
efficiency or not. The literature review is classified into three viz. ‘Studies using Accounting
Measures’, ‘Studies using Event Studies’ and Studies using Multiple Performance Measures’.
state that bidding firms do not under perform relative to the market. Moellera, Schlingemannb and
Stulz (2004) observe that the announcement returns for acquiring-firm shareholders higher irrespective
of the form of financing and whether the acquired firm is public or private. Leeth and Borg (2004)
observe that the acquisitions from 1905 to 1930 raised shareholder wealth. Fields, Fraser and Kolari
(2007) found that there is a positive bidder abnormal return for bancassurance mergers. Tsung-Ming
and Hoshino, 2000 cited from Ramakrishnan (2008) show that the stock market reaction to acquisition
announcement is positive. Chakrabarti (2008) found that the average Indian acquirer gains in value
both on announcement as well as over the long-run post takeover period and these gains are
statistically significant. Boubakri, Dionne and Triki (2008) suggest that M&A create value in the long
run as buy and hold abnormal returns are positive and significant. Anand and Singh (2008) found
merger announcement in the Indian banking industry has positive and significant shareholders wealth
effect both for the bidder and target banks. Soongswang (2009) observe that Thai takeovers create
values of the successful bidding firm’s shareholders. Dutta and Jog (2009) shows that there is long
term abnormal return for Canadian acquirers. Kyriazis (2010) found that the cumulative abnormal
return is statistically significant giving positive returns to acquiring firm shareholders
Kumar and Eckbo (1983) state that there is no significant evidence that horizontal merger
reduce the value of the competitors of the merging firms. Agrawal, Jaffe, Mandelker (1992) found that
the stockholders of the acquiring firm experience a statistically significant wealth loss after merger.
DeLong (1999) gives opposite view that diversifying mergers do not create value. Rosa, Engel, Moore
and Woodliff (2003) views that over the long-term, in the post-announcement period, acquiring firms
earn lower returns relative to those earned in the pre-acquisition performance but their relative
performance remains exceptionally good, on average. Mueller and Sirower (2003) shows that merger
destroy more of the value of the bidding firms than the amount paid as premium to the target. Rajib
(2007a) found that corporate performance do not improves after merger using market value model.
Dennis and Mcconnell (1986) found that acquired firm’s stockholders and bondholders receive
significant gains in mergers which is not the case with such stakeholders of acquiring companies. Leeth
and Borg (2000) state that target firm gained from the takeovers, while acquiring firm just break even
and combined gains were small. The cumulative abnormal return is positive to the target firm
shareholders. Fuller, Netter and Stegemoller (2002) found that the bidder shareholders gain when
buying a private firm or subsidiary but when purchasing a public firm. The greater the return, the larger
the target, and bidder offers stock. Gregory (2005) states that acquirer cash flows appear to be
positively associated with long run performance. Boone and Mulherin (2008) found that there is an
inverse relation between bidder returns and takeover competition.
underperformed compared to firms that did not engage in merger activity. Adavikolanu and Korrapati
(2009) states that the returns to the acquirers were marginally negative from the serial acquisition of
technology firms.
3. Hypothesis
Based on the research gap areas from the literature survey, the following research hypothesis is tested:
Ho: There is no difference in the post merger financial performances in manufacturing sector
companies in India.
Ha: The long term post merger financial performances changes in the post merger period in
manufacturing sector companies in India.
4. Research Methodology
The study is carried out over various years under consideration using Accounting Based Approach
using different financial parameters.
I. Profitability parameters are Return on Capital Employed (ROCE): EBIT/Capital
Employed (Kumar, 2009); Return on Net Worth (RONW): Profit after Tax /Net Worth
(Saboo and Gopi , 2009).
II. Liquidity parameters are Current Ratio: Current Assets/Current Liabilities (Kumar and
Rajib, 2007a); Quick Ratio: Quick Assets/ Quick Liabilities (Kumar and Rajib, 2007a);
Networking Capital/Sales: (Current Assets minus Current Liabilities) by Sales (Kumar
and Rajib, 2007a).
III. Leverage parameters are Total Debt Ratio: Total Debt to Total Assets (Kumar and
Rajib, 2007a); Interest Coverage Ratio: Earning before interest and taxes (EBIT)/Interest
(Kumar and Rajib, 2007a; Kumar and Bansal, 2008)
Initially 1193 merged companies were found in CMIE prowess. After applying the filtration as
discussed above, finally 115 mergers cases were found relevant to our study.
Paired Difference
Financial Ratios Level of
Mean* t value
Significance
Pre merger current ratio-post merger current ratio -1.211 -0.941 0.355
Pre merger quick ratio-post merger quick ratio -0.954 -0.989 0.332
Pre merger networking capital/sales ratio-post merger networking capital/sales
-0.245 -1.680 0.105
ratio
Pre merger total debt ratio-post merger total debt ratio 0.011 1.960 0.060
Pre merger interest coverage ratio-post merger interest coverage ratio -364.331 -1.327 0.196
Pre merger return on capital employed ratio-post merger return on capital
-0.210 -2.182 0.038
employed ratio
Pre merger return on net worth ratio-post merger return on net worth ratio -0.074 -0.430 0.671
* The negative sign in the value indicate there is an overall increase in the particular performance parameter in post merger
period compared to pre merger period. This note is applicable to Tables 2 to 6.
• The liquidity ratios like current ratio, quick ratio, and net working capital/sales ratio
improved after merger but it is statistically insignificant.
• In case of the leverage ratios, the debt ratio declined in the post merger period. But it is
not statistically significant. Interest coverage ratio has increased, but it is not statistically
significant too. The mean of interest coverage ratio shows very high figure, it may be
because of outliers.
• The good sign is that the profitability ratios have increased during the post merger period.
It is statistically significant in case of ROCE and statistically significant in case of
RONW.
12 International Research Journal of Finance and Economics - Issue 83 (2012)
Table 3: Paired Sample t test Results of 2004-05 Merger Deals
Paired Difference
Financial Ratios Level of
Mean t value
Significance
Pre merger current ratio-post merger current ratio -0.002 -0.015 0.988
Pre merger quick ratio-post merger quick ratio 0.078 0.994 0.326
Pre merger networking capital/sales ratio-post merger networking capital/sales
0.016 1.006 0.320
ratio
Pre merger total debt ratio-post merger total debt ratio 0.000 -0.202 0.841
Pre merger interest coverage ratio-post merger interest coverage ratio -.563.082 -1.020 0.313
Pre merger return on capital employed ratio-post merger return on capital
-0.149 -5.976 0.000
employed ratio
Pre merger return on net worth ratio-post merger return on net worth ratio -0.142 -6.670 0.000
• The liquidity ratios like current ratio improved after merger but it is statistically
insignificant. But the quick ratio, and net working capital/sales ratio has declined.
• In case of the leverage ratios, the debt ratio increased in the post merger period. But it is
statistically insignificant. Interest coverage ratio has increased, but it is statistically
insignificant too. The mean of interest coverage ratio shows very high figure, it may be
because of outliers.
• The profitability ratios have increased during the post merger period. It is statistically
significant in case of both ROCE and RONW.
Paired Difference
Financial Ratios Level of
Mean t value
Significance
Pre merger current ratio-post merger current ratio -0.03 -0.15 0.88
Pre merger quick ratio-post merger quick ratio -0.12 -0.59 0.56
Pre merger networking capital/sales ratio-post merger networking capital/sales
0.00 -0.03 0.97
ratio
Pre merger total debt ratio-post merger total debt ratio -0.02 -3.81 0.00
Pre merger interest coverage ratio-post merger interest coverage ratio 0.11 0.04 0.97
Pre merger return on capital employed ratio-post merger return on capital
-0.05 -2.14 0.04
employed ratio
Pre merger return on net worth ratio-post merger return on net worth ratio 1.79 0.96 0.35
• The liquidity ratios like current ratio, quick ratio, and net working capital/sales ratio
improved after merger but it is statistically insignificant.
• In case of the leverage ratios, the debt ratio increased in the post merger period and it is
statistically significant. Interest coverage ratio has decreased, but it is statistically
insignificant. The mean of interest coverage ratio shows very high figure, it may be
because of outliers.
• ROCE have increased and statistically significant but in case of RONW it has decreased
after mergers.
Paired Difference
Financial Ratios Level of
Mean t value
Significance
Pre merger current ratio-post merger current ratio 0.085 0.623 0.553
Pre merger quick ratio-post merger quick ratio 0.019 0.150 0.885
International Research Journal of Finance and Economics - Issue 83 (2012) 13
Table 5: Paired Sample t test Results of 2006-07 Merger Deals - continued
• The liquidity ratios like current ratio, quick ratio, and net working capital/sales ratio has
declined after merger but it is statistically insignificant.
• In case of the leverage ratios, the debt ratio increased in the post merger period which
means the debt has increased after merger. It is statistically significant. Interest coverage
ratio has increased, but it is statistically insignificant. It shows negative performance of
the companies after merger deals. The mean of interest coverage ratio shows very high
figure, it may be because of outliers.
• The good sign is that the profitability ratios have increased during the post merger period
but those are not statistically significant.
Table 6: Paired Sample t test Results for all Merger Deals from 2003-04 to 2006-07
Paired Difference
Financial Ratios Level of
Mean t value
Significance
Pre merger current ratio-post merger current ratio
Pre merger quick ratio-post merger quick ratio -0.232 -0.953 0.342
Pre merger networking capital/sales ratio-post merger networking
-0.053 -1.323 0.189
capital/sales ratio
Pre merger total debt ratio-post merger total debt ratio -0.003 -1.360 0.176
Pre merger interest coverage ratio-post merger interest coverage ratio -320.072 -1.363 0.176
Pre merger return on capital employed ratio-post merger return on capital
-0.127 -4.742 0.000
employed ratio
Pre merger return on net worth ratio-post merger return on net worth ratio 0.420 0.803 0.423
• The liquidity ratios like current ratio, quick ratio, networking capital/sales improved after
merger but it is statistically insignificant.
• In case of the leverage ratios, the debt ratio has increased in the post merger period. But it
is statistically insignificant. Interest coverage ratio has increased, but it is statistically
insignificant too. The mean of interest coverage ratio shows very high figure, it may be
because of outliers.
• The good sign is that the profitability ratio ROCE have increased during the post merger
period and is statistically significant. In case of RONW it has reduced but it is statistically
insignificant.
• The good sign is that the profitability ratio ROCE have increased during the post merger
period and is statistically significant. In case of RONW it has reduced but it is statistically
insignificant.
From the Table 7 it is observed that for the combined cases of mergers, return on capital
employed has gone up in the post merger period. Ignoring statistical significance, the liquidity, debt
ratio, and interest coverage ratio have gone up whereas working capital turnover and return on net
worth have declined.
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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012
1. INTRODUCTION
Mergers1 and acquisitions (M&A) in India are the outcome of globalisation and liberalisation. The
factors that have triggered the volume of M&A are various economic factors like competitive
environment, growth in gross domestic product, higher interest rates and fiscal policies. Mergers
and acquisitions have gained significance in corporate world as an important growth strategy for
both acquirer and target companies. M&A have mushroomed in almost all sectors like
manufacturing, mining, construction sector, financial services, and services other than financial.
Before the year 1990, companies in the electricity sector enjoyed monopoly where government
performed various functions like generation, transmission, distribution and commercial trading.
But there was significant change in the scenario after the economic reforms in 1991 because of
privatisation and deregulation electricity sector. These changes lead to distribution of various
functions like generation, transmission, distribution and trading to separate entities and
privatisation in distribution function. Hence, electricity companies were given importance due to
the presence of both private and government bodies in the electricity sector. There were many
1
Merger is a term used to refer when two corporations join together into one, with one
corporation surviving and the other corporation disappearing. The assets and liabilities of the
disappearing entity are absorbed into the surviving entity (Source: http://www.incorporating-
online.org/Definition-merger.html)
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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012
problems associated with the electricity sector before 1990 like huge technical and commercial
losses due to unprofessionally managed companies; problems of cross subsidisation; and
inadequate distribution channels that lead to poor quality of supply of electricity. These problems
were hurdles for ensuring financial feasibility, rationalisation of tariffs and facilitation of private
investment in attaining policy objectives. Thus, there was always a need for efficiency, economy,
and competition in electricity sector in India. M&A has also played an active role to facilitate the
mobilisation of resources in electricity sector in India.
2
Business Combinations definition: Here we have taken the definitions as in prowess database.
The business combinations means, companies acquiring assets, selling assets, merging with
another company, being merged into another company, minority acquisition of shares, substantial
acquisition of shares
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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012
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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012
To discuss the regulatory aspect it is first necessary to understand the nature of electricity sector
that differentiates it from other network industries. The characteristics of the industries is
important to know as it will help to know the nature of regulation and competition policy in the
sector and the problems involved in achieving the goals of the liberalisation process. It is also
important to know the features of electricity as a commodity. Firstly, for consumers electricity is a
homogenous product. It does not have any particular feature or quality that differentiates it.
Secondly, production costs are heterogeneous depending on the technology and the energy sources
used. Thirdly, demand is highly inelastic and there are no substitutes for it. This means that
changes in prices have little influence on consumption. Fourthly, unlike gas, electricity is a non-
storable commodity. It is not possible to produce more during normal periods in order to cover
peak demand periods. It is necessary instead to balance demand and supply at every single point in
time. Fifthly, the transmission (high voltage) and distribution (medium, low voltage) of electricity
depend on the distance, but also on the resistance in the transmission network. For these reasons,
in the case of congested network infrastructures, it is possible that inefficient generators located in
a specific place could provide electricity more cheaply than efficient generators in other locations.
The Electricity Act, 2003 is currently regulating the electricity sector in India with some
amendments in 2007 and 2008. This is an Act to consolidate the laws relating to generation,
transmission, distribution, trading and use of electricity and generally for taking measures
conducive to development of electricity industry, promoting competition therein, protecting
interest of consumers and supply of electricity to all areas, rationalisation of electricity tariff,
ensuring transparent policies regarding subsidies, promotion of efficient and environmentally
benign policies, constitution of Central Electricity Authority, Regulatory Commissions and
establishment of Appellate Tribunal and for matters connected therewith or incidental thereto. A
transfer scheme under this section may- (a) provide for the formation of subsidiaries, joint venture
companies or other schemes of division, amalgamation, merger, reconstruction or arrangements
which shall promote the profitability and viability of the resulting entity, ensure economic
efficiency, encourage competition and protect consumer interests; (b) define the property, interest
in property, rights and liabilities to be allocated - (i) by specifying or describing the property,
rights and liabilities in question; or (ii) by referring to all the property, interest in property, rights
and liabilities comprised in a described part of the transferor's undertaking; or (iii) partly in one
way and partly in the other; (c) provide that any rights or liabilities stipulated or described in the
scheme shall be enforceable by or against the transferor or the transferee; (d) impose on the
transferor an obligation to enter into such written agreements with or execute such other
instruments in favour of any other subsequent transferee as may be stipulated in the scheme; (e)
mention the functions and duties of the transferee; (f) make such supplemental, incidental and
consequential provisions as the transferor considers appropriate including provision stipulating the
order as taking effect; and (g) provide that the transfer shall be provisional for a stipulated period.
(6) All debts and obligations incurred, all contracts entered into and all matters and things engaged
to be done by the Board, with the Board or for the Board, or the State Transmission Utility or
generating company or transmission licensee or distribution licensee, before a transfer scheme
becomes effective shall, to the extent specified in the relevant transfer scheme, be deemed to have
been incurred, entered into or done by the Board, with the Board or for the State Government or
the transferee and all suits or other legal proceedings instituted by or against the Board or
transferor, as the case may be, may be continued or instituted by or against the State Government
or concerned transferee, as the case may be. (7) The Board shall cease to be charged with and shall
not perform the functions and duties with regard to transfers made on and after the effective date.
Explanation.- For the purpose of this Part, -(a) "Government company" means a Government
Company formed and registered under the Companies Act, 1956. (b) "Company" means a
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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012
company to be formed and registered under the Companies Act, 1956 to undertake generation or
transmission or distribution in accordance with the scheme under this Part.
As regards M&A transactions in the energy sector, some of the most relevant risks to be identified
by the buyer normally relate to regulatory issues (e.g. sale and tariff of electricity), the survival to
the transfer of shares of all permits, licences, concessions and authorisations held by the company,
agreements with the grid operator, liabilities on environmental matters (e.g. contamination of the
site) as well as liabilities on taxes, accounting, labour, health and safety, pending litigation, judicial
and/or extrajudicial (Marcenaro, E)
5 5 5
5
4
Volume
3 3
3
3
2 2 2
2
1
1
1
0 0
0 0 0
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year of Deals
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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012
2000 for the first time, the companies in electricity sector went for merger between the firms and
they were anti-competitive and made their presence in M&A market.
The companies involved in merger in electricity sector mostly are public limited companies.
Among the acquirer there is only one private limited company named Bhilai Electric Supply Co.
Pvt. Ltd. that merged with NTPC-SAIL Power Co. Pvt. Ltd. among the target there are two private
limited companies named L&T Power Investments. Pvt. Ltd. [Merged] and NTPC-SAIL Power
Co. Pvt. Ltd. There were more number of public limited companies than the private companies
which signifies that there is less reform in many segments in this electricity sector and lack of
private people implies lack of competition which may have lead to lack of good performance
record in this sector.
Mostly the companies belong to the industry group electricity generation than the electricity
distribution. Some of the target and target companies gone for deals other than the companies in
same industry like Ferro alloys, tyres & tubes, coal & lignite, polymers, trading, fund based
financial services, pig iron, steel, cement, sugar, trading, business consultancy. These acquirer and
target companies involved in electricity generation and distribution have gone of deals in different
industries may be to take the benefit of diversified business strategy or benefit of unrelated deals
like diversification of loss.
Most of the acquirer and target companies are owned by the business groups apart from Central
Government Commercial Enterprises, Private (Indian), State and Private Sector, State
Government- Commercial Enterprises. The ownership groups are Elgi Group, IndiaBulls Group,
Jaiprakash Group, Kalyani (Bharat Forge) Group, Kirloskar Group, Larsen & Toubro Group, Modi
Umesh Kumar, Monnet Group, Nava Bharat Group, NCL Group, Om Prakash Jindal Group,
Reliance Group [Anil Ambani], RPG Enterprises Group, S. Kumars Group, T G Venkatesh Group,
Tata Group, Torrent Group, VBC Group, Vedanta Group, Weizmann Group. Majority of deals are
done by Jaiprakash Group and Tata Group.
The related deals (Deals where acquirer and target were in Electricity Generation) occurred
between the following companies:
Table 2: Deals where Acquirer and Target were in Electricity Generation
Merger Date Acquirer Target
9-Jun-00 Tata Power Co. Ltd. Andhra Valley Power Supply Co. Ltd. [Merged]
Tata Hydro-Electric Power Supply Co. Ltd.
9-Jun-00 Tata Power Co. Ltd.
[Merged]
7-Dec-00 Tata Power Co. Ltd. Jamshedpur Power Co. Ltd. [Merged]
25-Jul-03 Reliance Infrastructure Ltd. B S E S Andhra Power Ltd. [Merged]
23-Mar-06 Torrent Power Ltd. Torrent Power A E C Ltd. [Merged]
23-Mar-06 Torrent Power Ltd. Torrent Power S E C Ltd. [Merged]
2-Aug-06 Bhilai Electric Supply Co. Pvt. Ltd. N T P C-S A I L Power Co. Pvt. Ltd.
3-Dec-08 Indiabulls Power Ltd. Indiabulls Power Services Ltd. [Merged]
25-Jun-09 Jaiprakash Power Ventures Ltd. Jaiprakash Power Ventures Ltd. [Merged]
23-Jul-10 J S W Energy Ltd. J S W Energy (Ratnagiri) Ltd. [Merged]
14-Feb-11 Jaiprakash Power Ventures Ltd. Bina Power Supply Co. Ltd. [Merged]
Jaypee Karcham Hydro Corporation. Ltd.
14-Feb-11 Jaiprakash Power Ventures Ltd.
[Merged]
Source: CMIE Prowess Database
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The number of related deals is 12 and unrelated deals are 45 over the sample period. Most of the
related deals are done in year 2000 and year 2006. In year 2000, Tata made mergers to bring the
group's power companies under one umbrella with a combined turnover of about Rs 3,000 crore.
The deal was made to get relaxation in stamp-duty norms by the state government. It was
considered year 2000 is good time to go for the deal as the stamp-duty norms are no longer as rigid
as it was in past. Again it was believed that existing shortages and demand growth in the western
grid will be able to absorb the new capacities planned by the company. In 2006, TEL merged with
Torrent Power AEC, Torrent Power SEC and Torrent Power Generation. The merger turned them
into first rate power utilities in terms of operational efficiencies and reliability of power supply.
Torrent has a generation capacity of 1600 MW and distributes electricity to Ahmadabad,
Gandhinagar and Surat. The related deal helped the company for making outstanding performance
in power distribution by the Government of India. In 2011, two deals were made by Jaiprakash
Power Ventures Ltd. Currently, Jaiprakash Associates owns 63 per cent stake in JHPL. Post
merger, its stake is expected to go beyond 80 per cent (depending upon the valuation). JHPL,
which generates 300 Mw power in Himachal Pradesh, has a market capitalisation of Rs 4,250
crore.
The deals done between cash and stock are discussed below:
Table 3: Companies Involved in Cash Deals
Merger Date Acquirer Company Target Company
7-Dec-00 Tata Power Co. Ltd. Jamshedpur Power Co. Ltd. [Merged]
22-Mar-02 C E S C Ltd. Cescon Ltd.
25-Jul-03 Reliance Infrastructure Ltd. B S E S Andhra Power Ltd. [Merged]
11-Feb-04 C E S C Ltd. Balagarh Power Co. Ltd.
23-Mar-06 Torrent Power Ltd. Torrent Power A E C Ltd. [Merged]
2-Aug-06 Bhilai Electric Supply Co. Pvt. Ltd. N T P C-S A I L Power Co. Pvt. Ltd.
16-Apr-08 Treadsdirect Ltd. [Merged] Geo Renewable Power Ltd. [Merged]
Shree Maheshwar Hydel Power
21-Apr-09 Entegra Ltd.
Corporation Ltd.
Kalyani Utilities Development Ltd.
25-Aug-09 B F Utilities Ltd.
[Merged]
16-Sep-09 V B C Ferro Alloys Ltd. Orissa Power Consortium Ltd.
8-Dec-09 Haldia Petrochemicals Ltd. H P L Cogeneration Ltd. [Merged]
26-Mar-10 Weizmann Ltd. Karma Energy Ltd. [Merged]
23-Jul-10 J S W Energy Ltd. J S W Energy (Ratnagiri) Ltd. [Merged]
26-Sep-11 S B E C Sugar Ltd. SBEC Bioenergy Ltd.
Source: CMIE Prowess Database
These deals are done with share swap ratio of 0: 0, which means target shareholders will gain zero
share of Acquirer Company for every shares of Target Company. No shares are required to be
issued by the holding Company who will take over the assets and liabilities of the subsidiary
company. It means they are involved in cash deals. All the acquirer and target in this case are
public limited companies. Among them five of the acquirers are unlisted companies and others are
listed with BSE listing in category A, B, T, but all these target companies are unlisted. The
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acquirer companies belong to the size deciles one, two, three while the target companies belong to
deciles one, two, four, seven, ten with seven targets with deciles zero. Most of the deals are done
in year 2009 and no deals year 2001. This cash deals comprised of 46 per cent of total deals done
in this sector.
Table 4: Electricity Companies Involved in Stock Deals
Share
Merger
Acquirer Company Target Company Swap
Date
Ratio (N)
Sarda Energy & Minerals
12-Jun-07 Chhattisgarh Electricity Co. Ltd. [Merged] 91:10
Ltd.
23-Mar-06 Torrent Power Ltd. Torrent Power SEC Ltd. [Merged] 47:1
Andhra Valley Power Supply Co. Ltd.
9-Jun-00 Tata Power Co. Ltd. 4:5
[Merged]
Nava Bharat Ventures
31-Mar-96 Nav Chrome Ltd. [Merged] 4:5
Ltd.
Tata Hydro-Electric Power Supply Co.
9-Jun-00 Tata Power Co. Ltd. 4:5
Ltd. [Merged]
Jaiprakash Power
25-Jun-09 Jaiprakash Power Ventures Ltd. [Merged] 3:1
Ventures Ltd.
15-Mar-03 Gujarat N R E Coke Ltd. Gujarat NRE Power Ltd. [Merged] 3:1
Jaiprakash Power
14-Feb-11 Bina Power Supply Co. Ltd. [Merged] 2:13
Ventures Ltd.
3-Dec-08 Indiabulls Power Ltd. Indiabulls Power Services Ltd. [Merged] 1:1
Neelachal Ispat Nigam
2-Dec-04 Konark Met Coke Ltd. [Merged] 1:1
Ltd.
India Infrastructure L&T Power Investments Pvt. Ltd.
17-Apr-06 1:1
Developers Ltd. [Merged]
Sterlite Industries (India)
26-Apr-00 Madras Aluminium Co. Ltd. 1:2
Ltd.
5-Jul-10 Reliance Power Ltd. Reliance Natural Resources Ltd. [Merged] 1:4
Jaiprakash Power Jaypee Karcham Hydro Corporation Ltd.
14-Feb-11 1:5
Ventures Ltd. [Merged]
25-Jul-06 NCL Industries Ltd. NCL Energy Ltd. [Merged] 1:6
Sree Rayalaseema Power Corporation. Ltd.
18-Sep-00 SRHHL Industries Ltd. 1:6
[Merged]
Monnet Ispat & Energy
15-Dec-03 Monnet Power Ltd. [Merged] 1:10
Ltd.
30-Oct-02 Kirloskar Industries Ltd. Kirloskar Power Supply Co. Ltd. [Merged] 1:61
Source: CMIE Prowess Database
This comprised 56 per cent of the total merger deals in electricity sector made in stock
deals. Highest number of stock deals are done in the year 2000 may be because during this year the
target companies are highly optimistic about the success of merger and want to retain their equity
stake in the resulting firm. It may also happen that acquirer companies have been paying a higher
premium for pure stock deals.
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To meet the orders received during the year 2001-02 for re-
Kirloskar Industries power of defence vehicles, and also for supply of engines
30-Oct- Ltd. & Kirloskar Power for Indian Navy ships. It will help to fulfil contract received
02 Supply Co. Ltd. the company to study the feasibility of re-powering certain
[Merged] Naval Ships and meet the requirements of the customers and
end users.
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6. LITERATURE REVIEW
There is vast number of research literatures on effects of mergers, acquisitions, and takeovers on
company performance. Study of both Indian and International research papers are made on the
works relating to post merger corporate financial performance. As surveyed through literature
most of the work is done in USA & UK apart from Malaysia, Japan, Australia, Greece, Canada,
and India. But limited works are done with respect to India. Research on M&As till date has not
been able to provide conclusive evidence whether they enhance efficiency or destroy wealth. The
literature review is organised as ‘Studies using Accounting Measures’, ‘Studies using Event
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studies’, ‘Studies using multiple performance measures’, ‘Studies on post merger performance in
electricity companies’.
6.1. Studies Focusing on Accounting Approach
Accounting approach use accounting and financial measures from financial statements to evaluate
the M&A success. There is evidence from various research studies that shareholders get negative
returns after M&A. There is no positive return from merger (Meeks, 1977; Mueller, 1980;
Chatterjee and Meeks, 1996; Parrino and Harris, 2001; Ghosh, 2001; Sharma and Ho, 2002; Salter
and Weinhold, 1979 cited from Bruner, 2004). Acquiring firms’ performs poorly in post merger
years (Meeks, 1977 cited from Bruner, 2004). The firms with tender offer activity were 3.1 per
cent less profitable than firm without the activity (Ravenscraft and Scherer, 1987; Dickerson,
Gibson and Euclid, 1997; Mueller, 1980 cited from Bruner 2004; Singh, 1975 cited from Daga,
2007). Acquirers get return on assets same as non acquirers, thus making M&A a zero Net Present
Value (NPV) activity (Healy, Palepu and Ruback, 1992). So above studies give evidence that
M&A are value destroying activities. There is post merger improvement of companies involved in
merger (Herman and Lowenstein, 1988; Ravenscraft and Scherer, 1989). The performance of
merged firms improves significantly after they are combined. Buyers, targets, combined firms
underperform their peers in five years before merger, and outperform their peers in five years after
(Carline et al, 2004). There is improvements in long run operating cash flow performance after
acquisition because of both increases in return on sales (operating cash flow per dollar of sales)
and in asset turnover (sales per dollar of assets) (Rahman and Limmack, 2004). There are cases
where companies involved in M&A may give both positive and negative returns. Operating
synergies in the form of additional cash flows is positive (12.9 per cent) and financial synergies in
the form of changes in required rate of return is negative (-3.6 per cent) after M&A (Seth, 1990).
Pautler (2001) made literature survey and found that pre merger and post merger studies provide
no clear answers to questions about the efficiency and market power effects of M&As. In case of
large scale studies (those used large sample, as viewed by Pautler, 2001) M&A are unsuccessful.
There is significant gain to target firms and little or no gains to acquiring firms. Again there is
price enhancement and cost reduction in multiple merger cases. Thus, from the above literature it
is concluded that accounting based studies shows mixed results. These mixed results may be
because of studies made in different countries or using different performance variables or other
deal specific factors.
6.2. Studies Focusing on Event Study Approach
The approach for the examination of abnormal stock returns to the shareholders of both acquirer
and target around the announcement of an offer is called event studies, event being the M&A
announcement. Acquisitions are not value-enhancing for shareholders (Morck et al. 1990).
Stockholders of the acquiring firm experience a statistically significant wealth loss of about 10 per
cent over five years after merger completion date (Agrawal et al., 1992). There is a small and
insignificant abnormal return for acquirer at the date of takeover announcement (Halpern, 1973;
Mandelkar, 1974; Ellert, 1976 from Brailsford and Knights, 1998).There is a negative relationship
between management shareholdings and post acquisition performance of high tech acquisitions.
High managerial ownership seems to reduce managers’ risk aversion and encourage over
investment in value diminishing high tech acquisitions (Gao and Sudarsanam, 2003).The acquiring
firm experiences considerably deteriorating operating performance after acquisition, but the poor
performance is generally not different from industry counter parts (Ken, 2004). The returns to the
acquiring companies are either zero or negative (Maletesta 1983 cited from Bruner, 2004). It is
also found that the post merger stock price and operating performance of the merged companies
are negative and even worse than the stock price and operating performance of a control portfolio
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of companies that did not merge (Becker et al., 2008). Various studies show evidence that both
acquiring and target firm get positive returns from M&A. Stockholders of target firms earn large
positive abnormal returns from tender offers (Dodd and Ruback, 1977; Moeller et al. 2004;
Dennis and McConnell 1986; Asquith et al. 1983; Leeth, 2000). The cumulative abnormal return is
statistically significant giving positive returns acquiring firm shareholders (Loderer and Martin,
1992; Frederikslust et al., 2005; Dutta and Jog, 2009). Combined returns to shareholders of
acquiring firm and target firm showed positive cumulative abnormal returns to both firms
(Berkovitch, 1993; Bradley et al., 1982; Mulherin, 2000; Fan and Goyal, 2002). Target return,
acquirer return and total returns are larger when targets have low q ratios and acquirers have high q
ratios (Servaes, 1991). Literature suggests that M&A returns are based on who gets the returns, the
timing of getting return. Acquiring firm shareholders make small gains before and large losses
after consolidation (Leeth and Borg, 1994). The shareholder value is found to be positive, even
though it is small (Pautler, 2001). Mergers and acquisitions result in benefits to the acquired firms'
shareholders and to the acquiring companies’ managers while in case of losses, it is suffered by the
acquiring companies' shareholders (Firth, 1980). Shareholders of target firm gain while
shareholders of acquirer either gain or lose (Kaplan and Weisbach, 1992). Mergers that focus both
geography and activity are value-increasing, whereas diversifying mergers do not create value
(DeLong, 2001). In stock market studies, it is found that there is significant gain to target firm
shareholders and little or no gain to acquiring firm shareholders around the time when the mergers
and acquisitions took place. Over the long-term, in the post announcement period, acquiring firms
earn lower returns relative to those earned in the pre acquisition performance but their relative
performance remains exceptionally good (Rosa et al., 2003). Since the return varies in different
situations, it is therefore important to know for whom performance is to be evaluated-target,
acquirer or combined firm; for which time period performance is to be evaluated-short term or
long term. There is mixed results in event study methodology also. It is therefore needed to know
the results of studies that have used both accounting return and event study methods to evaluate
the M&A performance.
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than average of the industry (Xiao and Tan, 2007). The analysis of pre and post merger
profitability and efficiency ratios for the acquiring firms shows that there is a differential impact of
mergers for different ratios (Agarwal, Nataraj and Singh, 2010). In nutshell, it is observed that
returns to acquirer are situational and the returns vary accordingly influenced by different factors
relating to M&A.
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regulatory bodies and competition authorities must be particularly vigilant in scrutinising mergers
in the electricity and gas sectors to ensure competitive environment.
Table 6: Pre and Post Merger One Year Return on Capital Employed
Year Rs. Crore T-1 (ROCE) T0 (ROCE) T+1(ROCE)
2000 Tata Power Co. Ltd. 0.12 0.14 0.12
2003 Reliance Infrastructure Ltd. 0.12 0.07 0.05
2004 C E S C Ltd. 0.12 0.15 0.13
2006 Torrent Power Ltd. 0 0.13 0.03
2009 Jaiprakash Power Ventures Ltd. 0.18 0.13 0.06
2010 J S W Energy Ltd. 0.18 0.16 0.12
0.12 0.13 0.09
During the post merger first year the return on capital employed for electric companies have not
improved and decreased even if it has risen compared to pre merger and merger year.
Table 7: Pre and Post Merger One Year Return on Net Worth
Year Rs. Crore T-1 (RONW) T0 (RONW) T+1(RONW)
2000 Tata Power Co. Ltd. 0.1 0.13 0.1
2003 Reliance Infrastructure Ltd. 0.11 0.05 0.05
2004 C E S C Ltd. 0.02 0.18 0.12
2006 Torrent Power Ltd. 0 0.07 0.03
2009 Jaiprakash Power Ventures Ltd. 0.21 0.13 0.07
2010 J S W Energy Ltd. 0.29 0.16 0.15
0.12 0.12 0.09
During the post merger first year the return on net worth for electric companies have not improved
and decreased If compared pre merger with merger year the RONW has remain unchanged.
Table 8: Pre and Post Merger Two Year Return on Capital Employed
T-2
T-1 T0 T+1(RO T+2(RO pre 2 post 2
Year Acquirer (ROC
(ROCE) (ROCE) CE) CE) year year
E)
2000 Tata Power Co. Ltd. 0.13 0.12 0.14 0.12 0.14 0.13 0.13
Reliance
2003 0.12 0.12 0.07 0.05 0.07 0.12 0.06
Infrastructure Ltd.
2004 C E S C Ltd. 0.11 0.12 0.15 0.13 0.12 0.12 0.13
0.12 0.11
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It is not only during the first year but during the second year the performance of electricity
companies decline in terms of return on capital employed.
Table 9: Pre and Post Merger Two Year Return on Net worth
T-2 T-1 T0 T+1(RO T+2(RO Pre 2 Post 2
Year Acquirer
(RONW) (RONW) (RONW) NW) NW) Year Year
Tata Power
2000 0.11 0.1 0.13 0.1 0.12 0.11 0.11
Co. Ltd.
Reliance
2003 Infrastructure 0.12 0.11 0.05 0.05 0.09 0.12 0.07
Ltd.
2004 C E S C Ltd. -0.2 0.02 0.18 0.12 0.11 -0.09 0.12
0.04 0.10
In terms of return net worth, the companies have improved after post merger and they were able to
generate money for the investments made by the shareholders.
Table 10: Pre and Post Merger Three Years Return on Capital Employed
T-3 T-2 T-1 T0
T+1(R T+2(R T+3(R pre 3 post 3
Year Acquirer (ROCE (ROCE (ROCE (ROC
OCE) OCE) OCE) year year
) ) ) E)
Tata
2000 Power Co. 0.13 0.13 0.12 0.14 0.12 0.14 0.15 0.3 0.14
Ltd.
Reliance
2003 Infrastruct 0.15 0.12 0.12 0.07 0.05 0.07 0.08 0.31 0.07
ure Ltd.
CESC
2004 0.08 0.11 0.12 0.15 0.13 0.12 0.14 0.23 0.13
Ltd.
0.28 0.11
Return on capital employed again decreased in post merger three years compared to pre merger
three years.
Table 11: Pre and Post Merger Three Year Return on Net Worth
T- T-2 T-1 T0
T+1(R T+2(R T+3(R pre 3 post 3
Year Acquirer (RON (RON (RON (RON
ONW) ONW) ONW) year year
W) W) W) W)
Tata Power
2000 0.08 0.11 0.1 0.13 0.1 0.12 0.11 0.22 0.11
Co. Ltd.
Reliance
2003 Infrastructu 0.13 0.12 0.11 0.05 0.05 0.09 0.09 0.29 0.08
re Ltd.
CESC
2004 -0.98 -0.2 0.02 0.18 0.12 0.11 0.15 -1.17 0.13
Ltd.
-0.22 0.10
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Even though the return on net worth has improved in second year, it has again declined in post
merger three years. It means in initial years due to merger pressure the profitability has declined,
and then it improved when company became stable and then it declined being affected by other
factors.
Table 12: Pre and Post Merger One Year Asset Turnover Ratio
Table 13: Pre and Post Merger Two Year Asset Turnover Ratio
Asset T0 T+2
T-2 T-1 T+1(A pos
Turnover Acquirer (ATR (AT pre 2
(ATR) (ATR) TR) t2
Ratio ) R)
0.4
2000 Tata Power Co. Ltd. 0.4 0.35 0.38 0.44 0.45 0.38
5
Reliance 0.3
2003 0.51 0.6 0.78 0.4 0.34 0.56
Infrastructure Ltd. 7
0.4
2004 C E S C Ltd. 0.35 0.38 0.46 0.49 0.37 0.37
3
Jaiprakash Power 0.0
2009 0.16 0.15 0.15 0.07 0.04 0.16
Ventures Ltd. 6
0.3
0.36
3
The two year average asset turnover ratio has declined when compared between pre and post
merger years by three per cent.
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Table 14: Pre and Post Merger Three Year Asset Turnover Ratio
T-3 T-2 T-1 T0 T+1( T+2( T+3( pr po
Acquirer (AT (AT (AT (AT ATR ATR ATR e st
R) R) R) R) ) ) ) 3 3
Tata Power Co. 0. 0.
2000 0.49 0.4 0.35 0.38 0.44 0.45 0.49
Ltd. 41 46
Reliance
0. 0.
2003 Infrastructure 0.53 0.51 0.6 0.78 0.4 0.34 0.27
55 34
Ltd.
0. 0.
2004 C E S C Ltd. 0.31 0.35 0.38 0.46 0.49 0.37 0.34
35 40
0. 0.
44 40
If assets turnover ratio is looked then there is no difference in the pre and post merger performance
in three years average.
Table 15: Performance of Tata Power Co. Ltd for deal with Andhra Valley Power Supply
Co. Ltd.
Year RONW ROCE ATR CR QR NWCS ICR TDR
Mar-95 0.11 0.11 0.49 1.1 0.52 780.04 2.57 0.52
Mar-96 0.18 0.19 0.5 0.4 0.4 -31.5 4.94 0.47
Mar-97 0.08 0.13 0.49 1.24 0.58 134.29 3.65 0.42
Mar-98 0.11 0.13 0.4 1.61 1.03 9 3.79 0.49
Mar-99 0.1 0.12 0.35 1.28 0.7 36.31 3.48 0.5
Average of 5 year pre merger 0.12 0.14 0.45 1.13 0.65 185.63 3.69 0.48
Mar-00 0.13 0.14 0.38 0.96 0.56 -15.8 4.16 0.5
Mar-01 0.1 0.12 0.44 1.76 1.33 4.35 3.28 0.5
Mar-02 0.12 0.14 0.45 1.2 0.82 31.48 3.26 0.49
Mar-03 0.11 0.15 0.49 1.12 0.69 -35.78 3.39 0.45
Mar-04 0.1 0.15 0.53 1.1 0.67 -80.14 3.83 0.36
Mar-05 0.11 0.11 0.43 1.73 1.31 5.53 5.32 0.44
Average of 5 year post merger 0.11 0.13 0.47 1.38 0.96 -14.91 3.82 0.45
Source: Evaluated from Financial data from CMIE Prowess Database
While evaluating performance of particular merger deal of Tata Power Co. Ltd with Andhra
Valley Power Supply Co. Ltd. [Merged], following findings are made:
• Return on Net Worth of Tata Power Co. Ltd improved in merger year if compared with
five year average of pre merger. But if five year average of pre and post merger is
compared then it has reduced.
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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012
• Return on Capital Employed of Tata Power Co. Ltd has remained unchanged if compared
with five year average of pre merger and if five year average of pre and post merger is
compared then it has reduced.
• Asset Turnover Ratio which is considered as best measure for companies that require a
large infrastructure in order to produce, or deliver their product, such as electric
companies that require a large asset base to generate sales, has improved if five year
average of pre and post merger is compared.
• Current Ratio and Quick Ratio has increased in five year average of post merger when
compared with five year average pre merger years.
• Net Working Capital/ Sales have declined significantly and has given negative returns in
post merger years.
• Tata Power Co. Ltd were able to generate sufficient money to pay back its debt as the
Interest Coverage Ratio has improved from 3.69 to 3.82 in five year average pre and post
merger year. The good thing is Total Debt Ratio has reduced which show the debt burn of
the companies have reduced after getting synergetic befits from the deal.
8. CONCLUSION
Electricity companies are going on merger spree for improving their market share by solving many
financial issues like cost. Post merger performance of companies have been better in second year,
while in the first year and average of three years the electricity companies have declined in
different ratios. The return on capital employed has never improved. But the return on net worth
and asset turnover ratio has increased in two year average pre and post merger years. Mergers and
acquisitions (M&A) in the electricity sector are expected to grow in coming years because to keep
the sector highly profitable in both the short and long term, there is need of M&A. The electricity
companies with strong financial backup acquiring leading to expansion of industry and company.
At that time, the electric power industry will enjoy a long-term development in a physically sound
way. No doubt M&A in electricity industries have resulted in economies of scale and synergetic
benefits to companies but still, it is suggested that acquirer companies should acquire those target
companies whose benefit is above its costs as there are also many problems associated with it like
job cuts which may hamper the ethical and cultural values. Following economic expansion and
large demand for power, the electric power industry has stepped in an accelerated phase of M&A.
The current market is that the major role was played by government owned companies while
private players small part. The local electricity companies have stayed focused on acquisition to
improve their core competitiveness with expanding market share.
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_________________________________________________ 82
Kushagra International Management Review
ISSN 2250‐0960 Issue II 2012
Kushagra Institute of Information & Management Science
Performance Evaluation on Acquisitions in India:
A Case Study on ACC limited acquisition of Everest Industries
N.M. Leepsa*
Abstract:
Mergers and acquisitions have gained its significance around the world. Therefore most of
the research is carried out to find out whether they are value creating or value destroying in nature.
Limited Studies are undertaken in respect of Indian merger and Acquisition cases. Most of the
empirical studies are based on accounting approach or market approach. This paper made case study
analysis using financial return method and market return method. Case study was undertaken for the
deal ACC limited and Everest Industries limited. It is found that deal ACC limited and Everest
Industries limited is a successful deal. Merger has helped in revenue increase and cost decrease.
Introduction
Long term success of business depends on the various growth strategies. One of such
business strategy to gain competitive advantage is merger and acquisitions. As said by Marco
Boschetti that, “A paradox exists in the world of mergers and acquisitions. Other studies that have
looked at M&A deals in the past 20 years have found that deals in earlier M&A cycles destroyed,
rather than created, shareholder value. Yet to grow to be an organization operating on a global
scale, it is almost impossible to do so quickly enough through organic growth alone. Mergers and
acquisitions have in many ways become necessary.”
Mergers and acquisitions have gained its significance around the world. With the opening of
economy mergers and acquisitions have mushroomed in India too. Lot of research are done to find
out whether these inorganic growth strategies are value creating or value destroying in nature. Most
of the studies are done evaluating the operating and financial performance of companies in USA, UK,
Canada, Australia and also India. But few works are done in India specifically when the Indian market
is growing and when there are increased volume of M&A. This research gap has prompted to
evaluate the company performance specifically in manufacturing sector. Each merger and
acquisition case differs from each other. Therefore this is an attempt to look into performance of
particular deal in manufacturing sector.
Research Methodology
A case study analysis was undertaken in which companies in different sector were chosen.
Case study was done on two acquisition1 deals one of which is manufacturing sector and other is
from the financial sector. The companies are analysed for a period of nine years in acquisition and
nine years post acquisition. The analysis was done on the following basis:
Brief historical background of the acquirer and target companies.
Nature of deal
Financial analysis using
Liquidity Parameters ( Current ratio2, Quick Ratio3, Networking capital /Sales
Ratio4)
1
Acquisition is a purchase by one company of a substantial part of the assets or securities of another, normally
for the purpose of restructuring the operations of the acquired entity. The purchase may be of all or a substantial
part of the target’s voting shares or of a division of the target firm (Daga, 2007, p10).
2
Current Ratio is defined as the current assets by current liabilities and provisions
1
Solvency Parameters (Interest Coverage Ratio5, Total Debt Ratio6)
Profitability Parameters (Return on Capital Employed7, Return on Net worth8)
Cost Analysis (Expenses/Sales Ratio)
Economic Profit (Rate of EVA (Economic Value Added/Average Net worth)9
Method of Analysis
Improvement or deterioration of sales trend by calculating the increase / decrease in Net
Sales over previous period
Sales were related to total assets of the company for understanding the efficiency of the
management in utilising the assets for generating sales.
For each financial ratio the pre and post performance was evaluated. The average of the pre
and post ratios were compared
Sample
Table 1 Sample Case Details
Deal type Acquisition or takeover
Status of deal Deal completed
Year of acquisition 2001
Name of Acquirer Company ACC limited
Name of Target Company Everest Industries limited
Sector of Acquirer and Target Listed Manufacturing
Industry of Acquirer and Target Non Metallic Mineral Products
Type of Deal Related Deal/ Congeneric Deal
Deal Value Rs. 1628 crore
Source: CMIE Prowess Database
Period of Study
The study is carried out for 18 years from period 31st March 1992 to 31st March 2010. The pre
acquisition and post acquisition period is 9 years each (‐9 to +9).
Source of Data
Published annual reports of Companies
Prowess database (CMIE)
Tools and Techniques
Wilcoxon sum of Rank Test
ACC Limited vs. Everest Industries Limited
In this section the effectiveness of the acquisition of ACC Limited vs. Everest Industries
Limited which took place in 2001. The effectiveness of the acquisition is evaluated and assed using
accounting approach. For the purpose of evaluating performance, the pre acquisition period is 31st
March 1992 to 31st March 2000 and Post acquisition period is 31st March 1992 to 31st March 2010.
3 Quick ratio is defined as current assets minus inventories whole divided by current liabilities and provisions
4 Networking Capital/sales is current assets minus current liabilities and provisions whole divided by sales.
Sales are taken to adjust for the size of the companies.
5 Interest coverage ratio is defined as profit before interest and taxes (PBIT) divided by interest
6 Total Debt Ratio is defined as total debt divided by total assets. Total debts is the summation of current
liabilities and provisions and borrowings
7 Return on capital employed is defined as the profit before interest and taxes (PBIT) divided by capital
employed.
8 Return on Net Worth is defined as the Profit after Tax (PAT) divided by Net worth
9 The formula that defines EVA from equity holders’ point of view is below: EVA= Net Profit – Cost of Equity
*Average Net Worth. Ke is estimated using Capital Asset Pricing Model: Ke =Rf + βi (Rm-Rf) Where
Rf = Risk Free Rate of Return ; Rm= Rate of Return on Market Index; βi = Beta or Company Stock
2
Basic Information about the companies
ACC Limited
Table 2 Basic Information on ACC Limited
Year of Incorporation 1936
Economic Activity Cement
Industry Name Cement
Ownership Group Holcim (F) Group
Scrip ISIN Code INE012A01025
BSE Listing Flag A
Industry Type Non‐Financial
Source: CMIE Prowess Database
History of ACC Limited
In a historic merger of 10 cement companies, ACC (formerly known as Associated Cement
Companies) was incorporated in 1936. It is one of the largest cement producers in India. The
company was owned by the Tata group during the period 1936‐2000. However, between 1999 and
2000, the Tata group sold its entire stake in ACC to Gujarat Ambuja Cements Ltd. in three stages. In a
major consolidation deal in 2005, Swiss cement major, Holcim in a strategic partnership with Ambuja
Cements acquired a majority stake in ACC through Ambuja Cement India Ltd. (ACIL), the holding
company. The company is mainly engaged in the manufacture of ordinary portland cement and
blended cement. It is the only cement company which has a pan‐‐India presence, with 15 cement
factories situated across the country. It has the largest distribution network in India with 170
warehouses and over 9,000 dealers. Some of the company's popular cement brands include 'ACC
Samrat', 'ACC Suraksha' and 'ACC Super'. The company also expanded through the acquisition route.
Cement companies acquired include Cement Marketing Co, Bulk Cement Corporation, Damodhar
Cement and Bargarh Cement (the latter two were merged with ACC in March 2006). The company
has taken various initiatives towards innovative concepts which include usage of waste material to
produce cement, induction of pollution control equipment, commercial manufacture of ready‐‐mix
concrete and introduction of customer help centres. It has also shown interest in the fields of
Sustainable Development & Corporate Social Responsibility. In June 2008, it issued its first Corporate
Sustainable Development Report for the year 2007. With a view to completely focus on its core
cement business, the company divested its refractory business as well as a 50 per cent stake in
Everest Industries in 2005. In line with this strategy, the company sold its entire share‐holding in the
wholly owned, subsidiaries ‐ ACC Nihon Castings and ACC Machinery Company in July 2007 and
March 2008 respectively. It also offloaded certain surplus assets including land at Haryana, for a
consideration of Rs.205 crore in November 2007.
3
Key Performance Indicators:
Figure 1 Figure 2
Source: Company website
Figure 3 Figure 4
Source: Company website
Figure 5 Figure 6
Source: Company website
4
Figure 7 Figure 8
Source: Company website
Figure 9 Figure 10
Source: company website
Figure 11 Figure 12
5
Table 3 List of Mergers and Acquisitions of ACC Ltd
Deals where ACC Ltd is target
Date Deal Type Acquirer Company Price/Cost Swap Ratio
29‐Mar‐99 Sale of asset Tata Power Co. Ltd. 9000
12‐Jul‐99 Takeover Tata Sons Ltd. 4357
23‐Dec‐99 Takeover Ambuja Cements Ltd. 45510
15‐Jan‐00 Takeover Ambuja Cements Ltd. 0
22‐Mar‐00 Takeover Ambuja Cement India Pvt. Ltd. 0
24‐Apr‐00 Takeover Ambuja Cement India Pvt. Ltd. 26161.47
5‐Oct‐00 Takeover Ambuja Cement India Pvt. Ltd. 19299.98
22‐Feb‐01 Sale of asset Proposed 0
5‐Sep‐03 Takeover General Insurance Corpn. Of India 1516
11‐Oct‐03 Takeover Life Insurance Corpn. Of India 27800
7‐Jan‐05 Sale of asset Mancherial Cement Co. Pvt. Ltd. 0
21‐Jan‐05 Takeover Holdcem Cements Pvt. Ltd. 256402.6
14‐Jul‐05 Sale of asset I C I C I Venture Funds Mgmt. Co. Ltd. 25700
30‐Jun‐06 Sale of asset Mancherial Cement Co. Pvt. Ltd. 0
26‐Feb‐07 Takeover Holcim Ltd. 0
8‐Mar‐07 Takeover Ambuja Cement India Pvt. Ltd. 0
8‐May‐07 Takeover Holcim Ltd. 52900
Deals where ACC Ltd is Acquirer
Date Deal Type Target company Price/Cost Swap Ratio
15‐Mar‐99 Takeover A C C‐Nihon Castings Ltd. [Merged] 0
10‐May‐00 Takeover A C C‐Nihon Castings Ltd. [Merged] 700
18‐Dec‐01 Takeover Everest Industries Ltd. 1628
3‐Dec‐03 Takeover Bargarh Cement Ltd. [Merged] 17641
20‐Jan‐04 Merger Bargarh Cement Ltd. [Merged] 0
11‐Mar‐04 Takeover Bargarh Cement Ltd. [Merged] 2684.5
19‐Jul‐04 Sale of asset Tata Power Co. Ltd. 0
6‐May‐05 Merger Damodhar Cement & Slag Ltd. [Merged] 0
15‐Dec‐05 Takeover Tarmac (India) Pvt. Ltd. [Merged] 1240
11‐May‐06 Merger Tarmac (India) Pvt. Ltd. [Merged] 0
20‐Apr‐07 Takeover Shiva Cement Ltd. 1595
20‐Dec‐07 Sale of asset A C C Concrete Ltd. 10000
3‐Feb‐11 Merger Lucky Minmat Ltd. 0
3‐Feb‐11 Merger National Lime Stone Co. Pvt. Ltd. 0
3‐Feb‐11 Merger Encore Cement & Additives Pvt. Ltd. 0
Source: CMIE Prowess Database
Everest Industries Limited
Table 4 Basic Information on Everest Industries Limited
Year of Incorporation 1934
Economic Activity Asbestos‐Cement Products
Industry Name Other Non‐Metallic Mineral Products
Ownership Group Gujarat Ambuja Cement Group
6
Scrip ISIN Code INE295A01018
BSE Listing Flag T
Industry Type Non‐Financial
Source: CMIE Prowess Database
History of Everest Industries Limited
Everest Industries Limited was incorporated in 1934. It was named as Asbestos Cement Ltd.,
as a Private Limited Company under the Indian Company Act, VII of 1913 with two corporate
shareholders viz., C.P. Cement Co. Ltd., [which subsequently in 1936 merged with other companies
to form Associated Cement Companies Ltd.s] and Turner and Newall Ltd., U.K. The name of
Company was changed to Asbestos Cement Pvt. Ltd as per the requirement of law under the
Companies Act, 1956. The name was again changed to Asbestos Cement Ltd., in 1960 when the
Comp. became a deemed public limited Comp. under Section 43A of Company Act, 1956. On 24
October 1983, the name of the company was again changed to Everest Building Products Ltd. It was
further changed to Eternit Everest Ltd. on 18 September 1990 and was renamed as Everest
Industries Ltd. on 29 August 2003. The company was listed on the Bombay Stock Exchange (BSE) on
22 December 1983 and on the National Stock Exchange (NSE) on 21 December 1994. The registered
office of the company is located at Lakhampur in Nashik, Maharashtra. The company is part of the
Gujarat Ambuja Cement Group and is promoted by Everest Finvest India Pvt. Ltd., Trapu Cans Pvt.
Ltd. and Falak Investment Pvt. Ltd.
The objective of company is to produce asbestos cement sheeting products like corrugated
curved tanks, corrugated roofing sheets, roofing extractors, and accessories for roofing sheets. The
products are Asbestos Cement Corrugated (CBS) roofing sheets and other Moulded Goods
(Accessories)It is known by its the brand name 'Everest'. The Company is the first company to set up
facilities for manufacturing asbestos cement roofing sheets in India by establishing its first factory at
Kymore in Madhya Pradesh. The manufacturing business was expanded progressively by establishing
a second sheeting factory at Mulund [Mumbais] in 1937, a third factory at Calcutta in October 1938
& a fourth factory at Podanur near Coimbatore in Tamil Nadu in November 1953.
Table 5 List of Mergers and Acquisitions of Everest Industries Ltd
Deals where Everest Industries Ltd. is target
Date Deal Type Acquirer Company Price/Cost Swap ratio
28‐Sep‐01 Sale of asset Nirmal Lifestyle Ltd. 4300
18‐Dec‐01 Takeover A C C Ltd. 1628
15‐Jan‐04 Sale of asset Nirmal Developers Pvt. Ltd. 7800
25‐Jan‐05 Takeover Accurate Finstock Pvt. Ltd. 20472.45
17‐Oct‐05 Takeover Everest Finvest (India) Pvt. Ltd. 5446.4
Source: CMIE Prowess Database
Financial Position of ACC Ltd and Everest Industries Limited
The financial position of ACC Ltd and Everest Industries Limited are shown for 18 years on the
following grounds:
o Growth (Percentage Change of Total Assets and Sales (In Rs. Crore) of the Companies
over Previous Year)
o Efficiency (Percentage Change of Assets Turnover Ratio of the Companies over Previous
Year )
o Revenue Generation (Percentage Change of PAT/Sales Ratio of the Companies over
Previous Year)
o Cost Reduction: (Percentage Change of Expenses/Sales Ratio of the Companies over
Previous Year )
7
Table 6 Percentage Change of Total Assets (In Rs. Crore) of the Companies over Previous Year
Assets A C C Ltd. % Change Everest Industries Ltd. % Change
Mar‐92 1035.47 ‐ 62.28 ‐
Mar‐93 1351.25 0.23 68.49 0.09
Mar‐94 1569.13 0.14 81.59 0.16
Mar‐95 1842.27 0.15 107.7 0.24
Mar‐96 2179.25 0.15 125.12 0.14
Mar‐97 2447.58 0.11 139.73 0.10
Mar‐98 2937.8 0.17 149.75 0.07
Mar‐99 2952.01 0.00 152.3 0.02
Mar‐00 3201.28 0.08 158.28 0.04
Mar‐01 3457.24 0.07 195.07 0.19
Mar‐02 3508.67 0.01 176.74 ‐0.10
Mar‐03 3581.56 0.02 158.29 ‐0.12
Mar‐04 3917.92 0.09 162.28 0.02
Mar‐05 4430.83 0.12 226.6 0.28
Mar‐06 4933.91 0.10 238.27 0.05
Mar‐07 6012.86 0.18 350.82 0.32
Mar‐08 7116.66 0.16 399.23 0.12
Mar‐09 8643.51 0.18 505.01 0.21
Mar‐10 10195.44 0.15 490.65 ‐0.03
Source: Evaluated
Table 7 Percentage Change of Sales (In Rs. Crore) of the Companies over Previous Year
Year A C C Ltd. % Change Everest Industries Ltd. % Change
Mar‐92 1409 ‐ 109.48 ‐
Mar‐93 1505.79 0.06 105.48 ‐0.04
Mar‐94 1618.13 0.07 111.14 0.05
Mar‐95 2042.7 0.21 124.1 0.10
Mar‐96 2329.46 0.12 102.46 ‐0.21
Mar‐97 2451.05 0.05 148.28 0.31
Mar‐98 2373.11 ‐0.03 140.49 ‐0.06
Mar‐99 2585.83 0.08 146.11 0.04
Mar‐00 2679.22 0.03 149.37 0.02
Mar‐01 2936.12 0.09 156.08 0.04
Mar‐02 3226 0.09 136.72 ‐0.14
Mar‐03 3371.88 0.04 209.91 0.35
Mar‐04 3900.37 0.14 199.49 ‐0.05
Mar‐05 4549.8 0.14 227.78 0.12
Mar‐06 3723.51 ‐0.22 255.21 0.11
Mar‐07 6468.06 0.42 326.81 0.22
Mar‐08 7866.62 0.18 321.36 ‐0.02
Mar‐09 8274.61 0.05 560.3 0.43
Mar‐10 8803.17 0.06 682.21 0.18
Source: Evaluated
8
Table 8 Percentage Change of Assets Turnover Ratio of the Companies over Previous Year
Year A C C Ltd. % Change Everest Industries Ltd. % Change
Mar‐92 1.36 ‐ 1.76 ‐
Mar‐93 1.11 ‐0.23 1.54 ‐0.14
Mar‐94 1.03 ‐0.08 1.36 ‐0.13
Mar‐95 1.11 0.07 1.15 ‐0.18
Mar‐96 1.07 ‐0.04 0.82 ‐0.40
Mar‐97 1 ‐0.07 1.06 0.23
Mar‐98 0.81 ‐0.23 0.94 ‐0.13
Mar‐99 0.88 0.08 0.96 0.02
Mar‐00 0.84 ‐0.05 0.94 ‐0.02
Mar‐01 0.85 0.01 0.8 ‐0.18
Mar‐02 0.92 0.08 0.77 ‐0.04
Mar‐03 0.94 0.02 1.33 0.42
Mar‐04 1 0.06 1.23 ‐0.08
Mar‐05 1.03 0.03 1.01 ‐0.22
Mar‐06 0.75 ‐0.37 1.07 0.06
Mar‐07 1.08 0.31 0.93 ‐0.15
Mar‐08 1.11 0.03 0.8 ‐0.16
Mar‐09 0.96 ‐0.16 1.11 0.28
Mar‐10 0.86 ‐0.12 1.39 0.20
Source: Evaluated
Table 9 Percentage Change of PAT/Sales Ratio of the Companies over Previous Year
Year A C C Ltd. % Change Everest Industries Ltd. % Change
Mar‐92 0.08 ‐ 0.06 ‐
Mar‐93 0.04 ‐1.00 0.08 0.25
Mar‐94 0.04 0.00 0.07 ‐0.14
Mar‐95 0.08 0.50 0.18 0.61
Mar‐96 0.1 0.20 0.23 0.22
Mar‐97 0.03 ‐2.33 0.08 ‐1.88
Mar‐98 0.01 ‐2.00 0.06 ‐0.33
Mar‐99 0.02 0.50 0.01 ‐5.00
Mar‐00 ‐0.02 2.00 0.04 0.75
Mar‐01 0.02 2.00 0.05 0.20
Mar‐02 0.04 0.50 ‐0.01 6.00
Mar‐03 0.03 ‐0.33 0.05 1.20
Mar‐04 0.05 0.40 0.3 0.83
Mar‐05 0.08 0.38 0.08 ‐2.75
Mar‐06 0.15 0.47 0.12 0.33
Mar‐07 0.19 0.21 0.04 ‐2.00
Mar‐08 0.18 ‐0.06 0.04 0.00
Mar‐09 0.15 ‐0.20 0.03 ‐0.33
Mar‐10 0.18 0.17 0.04 0.25
Source: Evaluated
9
Table 10 Percentage Change of Expenses/Sales Ratio of the Companies over Previous Year
Year A C C Ltd. % Change Everest Industries Ltd. % Change
Mar‐92 0.96 ‐ 0.97 ‐
Mar‐93 0.99 0.03 0.96 ‐0.01
Mar‐94 0.98 ‐0.01 1.01 0.05
Mar‐95 0.95 ‐0.03 0.94 ‐0.07
Mar‐96 0.94 ‐0.01 0.88 ‐0.07
Mar‐97 0.99 0.05 0.98 0.10
Mar‐98 1.03 0.04 1.01 0.03
Mar‐99 1.02 ‐0.01 1.02 0.01
Mar‐00 1.06 0.04 1.05 0.03
Mar‐01 1.01 ‐0.05 1.04 ‐0.01
Mar‐02 0.98 ‐0.03 1.02 ‐0.02
Mar‐03 1.01 0.03 1.01 ‐0.01
Mar‐04 0.99 ‐0.02 0.95 ‐0.06
Mar‐05 0.95 ‐0.04 0.91 ‐0.04
Mar‐06 0.97 0.02 0.93 0.02
Mar‐07 0.85 ‐0.14 1 0.07
Mar‐08 0.87 0.02 1.03 0.03
Mar‐09 0.9 0.03 1 ‐0.03
Mar‐10 0.84 ‐0.07 0.98 ‐0.02
Source: Evaluated
Performance Evaluation of the Companies
The post acquisition performance of the combined firm is discussed below:
Table 11 Mean values during Pre and Post Acquisition
Ratios ‐5 year +5 Outcome ‐9 year +9 year Outcome
year
Current Ratio 10.91 28.65 Success 1.46 1.32 Failure
Quick Ratio 0.16 0.24 Success 0.83 0.73 Failure
Net working capital/sales 0.89 0.72 Failure 0.13 0.09 Failure
Total Debt Ratio 0.57 0.50 Success 0.54 0.50 Success
Interest Coverage Ratio 0.15 0.10 Failure 13.45 21.22 Success
Return on capital employed 0.10 0.20 Success 0.25 0.26 Success
Return on Net worth 0.57 0.50 Failure 0.17 0.21 Success
Expenses/Sales 1.52 1.38 Success 0.99 0.93 Success
10
Rate of EVA ‐0.03 0.07 Success 0.05 0.08 Success
Source: Evaluated
The liquidity position of the combined firms has decreased after acquisition but the solvency
position has improved. The long term solvency of the company helps not to go bankruptcy due to
short term solvency. But the company’s liquidity won’t be a problem as its ability to generate cash
10
Yield on Long Term Government Bond is considered as Risk Free Rate of Return (Rf) and Compound Annual
Growth Rate (CAGR) in Sensex or Nifty since inception is considered as Rate of Return on Market (Rm).
Accordingly, Rf =7% and Rm=15%. For the study the rate of EVA (EVA/Average Net worth) is taken so that it
would adjust for the size of the companies.
10
flow to service creditors is adequate. The acquirer has valuable assets and thus is not near
insolvency. Even they have generated enough profit over the years after acquisition compared to the
pre acquisition period. The economic value added which is considered as the true profit in view of
shareholders has also improved. The rate of EVA has increased after the acquisition which means
that the company has enough capacity to generate profit after taking into consideration the cost of
capital.
Conclusion:
The acquisition deal between the ACC limited and Everest Limited is a successful deal as it
has able to generate revenue and reduce cost due to the synergy between the two companies. The
evidence is the improvement in the economic value added. Even the solvency position improved in
the post acquisition period. The limitation of the study is that it has focused on only financial
performance in post acquisition period. Future studies can be recommended to be done in non
financial performance evaluation of the combined firm.
References:
Books
J. Rachna 2009. Mergers , Acquisitions, Corporate Restructuring in India: Procedures and
Case Studies, New Century, First Edition
Internet
http://www.source2update.com/Company‐History/Everest‐Industries‐ETEEVE.html,
accessed on 3rd may 2011
http://www.everestind.com/about.asp#t, accessed on 3rd May 2011
11
APPENDIX A LIQUIDITY RATIOS
Table 12 Performance based on Current Ratio
CR1a CR2a Outcome CR1t CR2t Outcome CR1c CR2c Outcome
1.55 1.18 F 1.3 1.37 S 1.24 1.28 S
1.57 1.12 F 1.36 1.96 S 1.24 1.54 S
1.36 1.16 F 1.24 1.88 S 1.20 1.52 S
1.33 1.14 F 1.38 1.37 F 1.26 1.26 F
1.43 0.92 F 1.43 1.64 S 1.18 1.28 S
1.49 1.12 F 1.35 1.33 F 1.24 1.23 F
1.77 0.98 F 1.55 1.61 S 1.27 1.30 S
1.68 0.95 F 1.34 1.79 S 1.15 1.37 S
1.32 0.7 F 1.79 1.54 F 1.25 1.12 F
Source: Evaluated
Table 13 Performance based on Quick Ratio
QR1a QR2a Outcome QR1t QR2t Outcome QR1c QR2c Outcome
0.97 0.76 F 0.59 0.83 S 0.78 0.80 S
0.94 0.64 F 0.53 0.55 S 0.74 0.60 F
0.92 0.69 F 0.42 0.88 S 0.67 0.79 S
0.94 0.58 F 0.6 0.86 S 0.77 0.72 F
0.97 0.47 F 0.77 0.93 S 0.87 0.70 F
0.93 0.74 F 0.71 0.9 S 0.82 0.82 F
1.16 0.66 F 0.87 0.9 S 1.02 0.78 F
1.2 0.67 F 0.65 0.87 S 0.93 0.77 F
0.85 0.45 F 0.8 0.81 S 0.83 0.63 F
Source: Evaluated
Table14 Performance based on Net Working Capital/Sales Ratio
NWCS1a NWCS2a Outcome NWCS1t NWCS2t Outcome NWCS1c NWCS2c Outcome
0.14 0.04 F 0.09 0.17 S 0.12 0.11 F
0.16 0.03 F 0.12 0.16 S 0.14 0.10 F
0.1 0.03 F 0.09 0.21 S 0.10 0.12 S
0.08 0.03 F 0.12 0.15 S 0.10 0.09 F
0.11 ‐0.03 F 0.2 0.19 F 0.16 0.08 F
0.1 0.03 F 0.14 0.14 F 0.12 0.09 F
0.15 0 F 0.21 0.21 F 0.18 0.11 F
0.13 ‐0.02 F 0.13 0.2 S 0.13 0.09 F
0.08 ‐0.11 F 0.22 0.13 F 0.15 0.01 F
Source: Evaluated
APPENDIX B SOLVENCY RATIOS
Table 15 Performance based on Interest Coverage Ratio
ICR1a ICR2a Outcome ICR1t ICR2t Outcome ICR1c ICR2c Outcome
6.09 1.97 F 33.12 0.14 F 19.605 1.055 F
2.33 1.82 F 27.84 12.33 F 15.085 7.075 F
1.97 3.22 S 32.6 163.16 S 17.285 83.19 S
12
2.92 5.42 S 26.09 55.64 S 14.505 30.53 S
3.92 10.6 S 45.13 32.17 F 24.525 21.385 F
1.74 20.79 S 29.16 4.96 F 15.45 12.875 F
1.09 19.06 S 18.87 3.01 F 9.98 11.035 S
1.32 21.75 S 2.94 2.14 F 2.13 11.945 S
0.67 18.52 S 4.25 5.19 S 2.46 11.855 S
Source: Evaluated
Table 16 Performance based on Total Debt Ratio
TDR1a TDR2a Outcome TDR1t TDR2t Outcome TDR1c TDR2c Outcome
0.5 0.69 S 0.34 0.57 S 0.42 0.63 S
0.65 0.66 S 0.34 0.24 F 0.50 0.45 F
0.72 0.58 F 0.4 0.25 F 0.56 0.42 F
0.61 0.55 F 0.42 0.46 S 0.52 0.51 F
0.53 0.65 S 0.5 0.37 F 0.52 0.51 F
0.59 0.38 F 0.41 0.62 S 0.50 0.50 F
0.82 0.32 F 0.46 0.76 S 0.64 0.54 F
0.74 0.39 F 0.45 0.58 S 0.60 0.49 F
0.77 0.42 F 0.44 0.42 F 0.61 0.42 F
Source: Evaluated
APPENDIX C PROFITABILITY RATIOS
Table 17 Performance based on Return on Capital Employed
ROCE1a ROCE2a Outcome ROCE1t ROCE2t Outcome ROCE1c ROCE2c Outcome
0.43 0.16 F 0.5 0 F 0.47 0.08 F
0.17 0.12 F 0.52 0.19 F 0.35 0.16 F
0.14 0.14 F 0.4 0.75 S 0.27 0.45 S
0.21 0.18 F 0.5 0.27 F 0.36 0.23 F
0.27 0.24 F 0.4 0.34 F 0.34 0.29 F
0.12 0.43 S 0.25 0.13 F 0.19 0.28 S
0.1 0.46 S 0.13 0.12 F 0.12 0.29 S
0.14 0.34 S 0.03 0.15 S 0.09 0.25 S
0.06 0.37 S 0.08 0.22 S 0.07 0.30 S
Source: Evaluated
Table 18 Performance based on Return on Net Worth
RONW1a RONW2a outcome RONW1t RONW2t outcome RONW1c RONW2c outcome
0.33 0.13 F 0.27 ‐0.02 F 0.30 0.06 F
0.18 0.1 F 0.26 0.1 F 0.22 0.10 F
0.15 0.15 F 0.21 0.6 S 0.18 0.38 S
0.26 0.24 F 0.4 0.17 F 0.33 0.21 F
0.24 0.25 S 0.32 0.24 F 0.28 0.25 F
0.07 0.39 S 0.15 0.09 F 0.11 0.24 S
0.01 0.35 S 0.11 0.1 F 0.06 0.23 S
0.06 0.25 S 0.02 0.1 S 0.04 0.18 S
13
‐0.05 0.27 S 0.07 0.17 S 0.01 0.22 S
Source: Evaluated
Table 19 Performance based on Assets Turnover Ratio
Pre A C C Everest ATR1c Post A C C Everest ATR2c outco
Ltd. Industries Ltd. Industries Ltd. me
Ltd.
1992 1.36 1.76 1.56 2002 0.92 0.77 0.85 F
1993 1.11 1.54 1.33 2003 0.94 1.33 1.14 F
1994 1.03 1.36 1.20 2004 1 1.23 1.12 F
1995 1.11 1.15 1.13 2005 1.03 1.01 1.02 F
1996 1.07 0.82 0.95 2006 0.75 1.07 0.91 F
1997 1 1.06 1.03 2007 1.08 0.93 1.01 F
1998 0.81 0.94 0.88 2008 1.11 0.8 0.96 S
1999 0.88 0.96 0.92 2009 0.96 1.11 1.04 S
2000 0.84 0.94 0.89 2010 0.86 1.39 1.13 S
Averag 1.02 1.17 1.10 Average 0.96 1.07 1.02 F
e
Source: Evaluated
Table 20 Performance based on Cash Profit/Sales Ratio
Pre A C C Everest CPS1c Post A C C Everest CPS2c Outco
Ltd. Industries Ltd. Industries me
Ltd. Ltd.
1992 0.12 0.07 0.10 2002 0.09 0.03 0.06 F
1993 0.07 0.09 0.08 2003 0.08 0.09 0.09 S
1994 0.06 0.08 0.07 2004 0.1 0.33 0.22 S
1995 0.09 0.19 0.14 2005 0.12 0.1 0.11 F
1996 0.12 0.25 0.19 2006 0.18 0.15 0.17 F
1997 0.06 0.1 0.08 2007 0.23 0.06 0.15 S
1998 0.04 0.05 0.05 2008 0.22 0.06 0.14 S
1999 0.05 0.03 0.04 2009 0.18 0.04 0.11 S
2000 0.02 0.03 0.03 2010 0.22 0.07 0.15 S
Average 0.07 0.10 0.08 Average 0.16 0.10 0.13 S
Source: Evaluated
Table 21 Performance based on PBDITA/Sales Ratio
Pre A C C Everest PBDITAS1c Post A C C Everest PBDITAS2c outc
Ltd. Industries Ltd. Industries ome
Ltd. Ltd.
1992 0.21 0.14 0.18 2002 0.15 0.05 0.10 F
1993 0.12 0.19 0.16 2003 0.13 0.13 0.13 F
1994 0.1 0.16 0.13 2004 0.14 0.4 0.27 S
1995 0.14 0.25 0.20 2005 0.16 0.15 0.16 F
1996 0.19 0.32 0.26 2006 0.25 0.2 0.23 F
1997 0.12 0.15 0.14 2007 0.3 0.1 0.20 S
1998 0.11 0.11 0.11 2008 0.3 0.11 0.21 S
14
1999 0.14 0.04 0.09 2009 0.26 0.1 0.18 S
2000 0.09 0.09 0.09 2010 0.31 0.1 0.21 S
Aver 0.14 0.16 0.15 Aver 0.22 0.15 0.19 S
age age
Source: Evaluated
Table 22 Performance based on PBDPTA/Sales Ratio
Pre A C C Everest combi Post A C C Everest combi outco
Ltd. Industries Ltd. ned Ltd. Industries Ltd. ned me
1992 0.18 0.13 0.16 2002 0.11 0.03 0.07 F
1993 0.08 0.18 0.13 2003 0.09 0.12 0.11 F
1994 0.06 0.15 0.11 2004 0.12 0.4 0.26 S
1995 0.1 0.25 0.18 2005 0.15 0.15 0.15 F
1996 0.15 0.31 0.23 2006 0.23 0.2 0.22 F
1997 0.07 0.15 0.11 2007 0.29 0.08 0.19 S
1998 0.04 0.13 0.09 2008 0.29 0.09 0.19 S
1999 0.07 0.04 0.06 2009 0.25 0.07 0.16 S
2000 0.03 0.09 0.06 2010 0.3 0.09 0.20 S
Avera 0.09 0.16 0.12 Avera 0.20 0.14 0.17 S
ge ge
Source: Evaluated
Table 23 Performance based on PBDTA/Sales Ratio
Pre A C C Everest combi Post A C C Everest combi outco
Ltd. Industries Ltd. ned Ltd. Industries Ltd. ned me
1992 0.18 0.13 0.16 2002 0.1 0.03 0.07 F
1993 0.08 0.18 0.13 2003 0.09 0.12 0.11 F
1994 0.06 0.15 0.11 2004 0.11 0.4 0.26 S
1995 0.1 0.25 0.18 2005 0.14 0.15 0.15 F
1996 0.15 0.31 0.23 2006 0.23 0.2 0.22 F
1997 0.07 0.15 0.11 2007 0.29 0.08 0.19 S
1998 0.04 0.1 0.07 2008 0.29 0.09 0.19 S
1999 0.07 0.04 0.06 2009 0.25 0.07 0.16 S
2000 0.03 0.08 0.06 2010 0.3 0.09 0.20 S
Avera 0.09 0.15 0.12 Avera 0.20 0.14 0.17 S
ge ge
Source: Evaluated
Table 24 Performance based on PBIT/Sales Ratio
Pre A C C Everest combi Post A C C Everest combi outco
Ltd. Industries Ltd. ned Ltd. Industries Ltd. ned me
1992 0.18 0.13 0.16 2002 0.1 0 0.05 F
1993 0.09 0.17 0.13 2003 0.08 0.08 0.08 F
1994 0.08 0.14 0.11 2004 0.09 0.36 0.23 S
1995 0.12 0.24 0.18 2005 0.12 0.13 0.13 F
1996 0.17 0.3 0.24 2006 0.2 0.17 0.19 F
1997 0.08 0.14 0.11 2007 0.26 0.07 0.17 S
15
1998 0.08 0.09 0.09 2008 0.26 0.08 0.17 S
1999 0.1 0.02 0.06 2009 0.22 0.07 0.15 S
2000 0.04 0.06 0.05 2010 0.28 0.08 0.18 S
Avera 0.10 0.14 0.12 Avera 0.18 0.12 0.15 S
ge ge
Source: Evaluated
Table 25 Performance based on PBT/Sales Ratio
Pre A C C Everest Combi Post A C C Everest Combi Outco
Ltd. Industries Ltd. ned Ltd. Industries Ltd. ned me
1992 0.15 0.12 0.14 2002 0.05 ‐0.01 0.02 F
1993 0.05 0.16 0.11 2003 0.04 0.07 0.06 F
1994 0.04 0.14 0.09 2004 0.07 0.36 0.22 S
1995 0.08 0.23 0.16 2005 0.1 0.13 0.12 F
1996 0.12 0.29 0.21 2006 0.18 0.17 0.18 F
1997 0.04 0.13 0.09 2007 0.25 0.05 0.15 S
1998 0.01 0.08 0.05 2008 0.25 0.06 0.16 S
1999 0.03 0.01 0.02 2009 0.21 0.04 0.13 S
2000 ‐0.02 0.04 0.01 2010 0.26 0.06 0.16 S
Avera 0.06 0.13 0.09 Avera 0.16 0.10 0.13 S
ge ge
Source: Evaluated
Table 26 Performance based on PAT/Sales Ratio
Pre A C C Everest Combined Post A C C Everest Combined Outc
Ltd. Industries Ltd. Industries ome
Ltd. Ltd.
1992 0.08 0.06 0.07 2002 0.04 ‐0.01 0.015 F
1993 0.04 0.08 0.06 2003 0.03 0.05 0.04 F
1994 0.04 0.07 0.055 2004 0.05 0.3 0.175 S
1995 0.08 0.18 0.13 2005 0.08 0.08 0.08 F
1996 0.1 0.23 0.165 2006 0.15 0.12 0.135 F
1997 0.03 0.08 0.055 2007 0.19 0.04 0.115 S
1998 0.01 0.06 0.035 2008 0.18 0.04 0.11 S
1999 0.02 0.01 0.015 2009 0.15 0.03 0.09 S
2000 ‐0.02 0.04 0.01 2010 0.18 0.04 0.11 S
Aver 0.04 0.09 0.07 Avera 0.12 0.08 0.10 S
age ge
Source: Evaluated
Table 27 Performance Based on Rate of EVA
REVA1a REVA2a Outcome REVA1t REVA2t Outcome RVA1c REVA2c Outcome
0.25 ‐0.02 F 0.15 ‐0.17 F 0.2 ‐0.095 F
0.05 ‐0.04 F 0.14 ‐0.04 F 0.095 ‐0.04 F
0.02 0.03 S 0.08 0.47 S 0.05 0.25 S
0.17 0.12 F 0.34 0.04 F 0.255 0.08 F
0.16 0.15 F 0.22 0.11 F 0.19 0.13 F
16
‐0.06 0.33 S 0.01 ‐0.06 F ‐0.025 0.135 S
‐0.12 0.26 S ‐0.04 ‐0.04 F ‐0.08 0.11 S
‐0.08 0.13 S ‐0.13 ‐0.05 S ‐0.105 0.04 S
‐0.19 0.16 S ‐0.08 0.04 S ‐0.135 0.1 S
0.02 0.12 S 0.08 0.03 F 0.05 0.08 S
Source: Evaluated
Table 28 Performances based on Expenses/Sales Ratio
Pre A C C Everest Comb Outc Post A C C Everest Comb Outc
Ltd. Industries ined ome Ltd. Industries ined ome
Ltd. Ltd.
1992 0.96 0.97 0.97 S 2002 0.98 1.02 1.00 S
1993 0.99 0.96 0.98 F 2003 1.01 1.01 1.01 F
1994 0.98 1.01 1.00 S 2004 0.99 0.95 0.97 F
1995 0.95 0.94 0.95 F 2005 0.95 0.91 0.93 F
1996 0.94 0.88 0.91 F 2006 0.97 0.93 0.95 F
1997 0.99 0.98 0.99 F 2007 0.85 1 0.93 S
1998 1.03 1.01 1.02 F 2008 0.87 1.03 0.95 S
1999 1.02 1.02 1.02 F 2009 0.9 1 0.95 S
2000 1.06 1.05 1.06 F 2010 0.84 0.98 0.91 S
Aver 0.99 0.98 0.99 F Aver 0.93 0.98 0.96 S
age age
Source: Evaluated
Table 29 Sales Position
Pre M&A Sales Post M&A Sales difference
1992 1409 Mar‐02 3226
1993 1505.79 Mar‐03 3371.88 ‐0.02
1994 1618.13 Mar‐04 3900.37 0.08
1995 2042.7 Mar‐05 4549.8 ‐0.10
1996 2329.46 Mar‐06 3723.51 ‐0.32
1997 2451.05 Mar‐07 6468.06 0.68
1998 2373.11 Mar‐08 7866.62 0.25
1999 2585.83 Mar‐09 8274.61 ‐0.04
2000 2679.22 Mar‐10 8803.17 0.03
Average 2110.48 Average 5576.00 0.07
Source: Evaluated
17