Post-Merger Liquidity and Solvency Position: An Empirical Analysis of selected companies in India

*Abhimanyu Sahoo

Abstract

In the LPG era mergers and acquisitions (M&A) are widely used the world over for improving competitiveness of Companies. It helps not only in gaining greater market share but also encourages for entering into new markets and geographies. The present study is an attempt to examine the impact of merger and acquisition on the operating performance of acquiring firms in different industries in India by analyzing some pre-merger and post-merger financial ratios of sampled companies. Statistical paired sample t test has been performed to find out the difference. The results suggested that there are some minor variations in terms of impact on operating performance following mergers in different industries in India.

Keywords:Merger and Acquisition, Liquidity, Leverage, Long-run, Short-term

*Abhimanyu Sahoo, Research Scholar, School of Commerce and Management Studies, Ravenshaw University, Cuttack.E-mail-

INTRODUCTION

A company can achieve growth through either internal or external expansion. Internal expansion refers to extending the horizons of same business by increasing production of same products and services or through diversification. To increase the shareholders’ value companies follow external expansion strategy. External expansion strategy leads to growth resulting from the acquisition or merging another company. The term merger is employed to describe a process by which one company amalgamates with another company to maximize the wealth of its shareholders.

Merger and acquisition is believed to be a significant and increasingly popular means for achieving corporate diversity and growth. The motives of merger include achieving synergies and influenced by managerial expertise which leads to strengthening their competitive advantage in the market over their rivalry or competitors. This can be achieved through utilising their core competence in the area of their expertise which is complementary to each other so that they can reap the advantage of market opportunities to the fullest extent together, which they could not achieve individually. With effective control, the experience of the acquiring company’s management may contribute to synergy and increase post merger performance. A company may have control on another company only by acquiring shares in that company. In case of mergers and acquisitions, besides, diversifying business and increasing shareholders’ value, companies have some auxiliary aims which make extra benefits such as decreasing cost by sharing activities, increasing competitiveness of the organisation, enhancing the potential skills of staff, promoting more research and development facilities,etc.

OBJECTIVES OF THE STUDY

  1. To analyze the effect of merger on Liquidity Standards of the surviving entity in each company under review in the long-run.
  2. To examine the effect of merger on the Leverage Standards of the surviving companies in the long-run.

RESEARCH HYPOTHESIS

H0:There is no significant improvement in the liquidity position of the surviving companies after merger and acquisitionin the long-run.

H0: There is no effect on leverage standards of the surviving companiesafter the merger and acquisitionin the long-run.

REVIEW OF LITERATURE

Saple V. (2000), “Diversification, Mergers and their Effect on Firm Performance: A Study of the Indian Corporate Sector” he finds that the target firms were better than industry averages while the acquiring firm shad lower than industry average profitability. Overall, acquirers were high growth firms which had improved the performance over the years prior to the merger and had a higher liquidity.

Vanitha. S (2007) “Mergers and Acquisition in Manufacturing Industry” she analyzed the financial performance of the merged companies, share price reaction to the announcement of merger and acquisition and the impact of financial variables on the share price of merged companies. The author found that the merged company reacted positively to the merger announcement and also, few financial variables only influenced the share price of the merged companies.

Vanitha. S and Selvam. M (2007)in their research article on “Financial Performance of IndianManufacturing Companies during Pre and Post Merger”, they analyzedthe pre and post merger performance of Indian manufacturing sectorduring 2000-2002 by using a sample of 17 companies out of 58 (thirtypercent of the total population). For financial performance analysis,they used ratio analysis, mean, standard deviation and t-test. Theyfound that the overall financial performance of merged companies inrespect of 13 variables were not significantly different from the expectations.

Kumar (2009), "Post-Merger Corporate Performance: an Indian Perspective" examined the post-merger operating performance of a sample of 30 acquiring companies involved in merger activities during the period 1999-2002 in India. The study attempts to identify synergies, if any, resulting from mergers. The study uses accounting data to examine merger related gains to the acquiring firms. It was found that the post -merger profitability, assets turnover and solvency of the acquiring companies, on average, show no improvement when compared with pre- merger values.

Pramod Mantravadi & A Vidyasagar Reddy (2008), in their empirical study “Post-Merger Performance of Acquiring Firms from different Industries in India”, aimed to study the impact of mergers on the operating performance of acquiring corporate in different Industries, by examining some pre-merger and post-merger financial ratios, with the sample of firms chosen as all mergers involving public limited and traded companies in India between 1991 and 2003. The result suggests that there are minor variations in terms of impact on operating performance following mergers in different Industries in India

Dr. Salma Ahmed & Yasser Mahfooz (2009) in their case study paper, “Consolidation in the Sky - A Case Study on the Quest for Supremacy between Jet Airlines and Kingfisher Airlines”, did an attempt to descriptively analyze the rationale for consolidation in the Indian airline industry. The paper also evaluates major changes in the business environment affecting the airline industry.

Dr. Neena Sinha, Dr.K.P.Kaushik & Ms. Timcy Chaudhury (2010) in their research article on “Measuring Post Merger and Acquisition Performance: An Investigation of Select Financial Sector Organizations in India”, examines the impact of mergers and acquisitions on the financial efficiency of the selected financial institutions in India. The analysis consists of two stages. Firstly, by using the ratio analysis approach, they calculate the change in the position of the companies during the period 2000-2008. Secondly, they examine changes in the efficiency of the companies during the pre and post merger periods by using non-parametric Wilcoxon signed rank test. The result of the study indicate that M&A cases in India show a significant correlation between financial performance and the M&A deal, in the long run, and the acquiring firms were able to generate value.

N. M. Leepsa & Chandra Sekhar Mishra (2012) in their research paper on “Post Merger Financial Performance: A Study with Reference to Select Manufacturing Companies in India”, intends to study the trend in merger and acquisition (M&A) particularly with reference to manufacturing 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 statistical tools used are descriptive statistics, paired sample t-test

Sunil Kumar (2013) in his research article “Impact of Substantial Shareholdings on Synergy Creation in Post-mergers and Acquisitions Period” attempts to study the impact of substantial shareholdings on Synergy Creation in Post-mergers and Acquisitions Period. In this paper, it has been investigated that how the substantial shareholding of acquirer company in the target company lead to create synergy after mergers. With the help of Anova and TUKEY HSD test, it has been observed that substantial shareholding of Acquirer Company before merger has impact on research and development and represented as synergy after merger.

The present study is an existing gap which attempts to find out the difference in post-merger performance compared with pre-merger in terms of liquidity and leverage standards in the long-run in different Industries in India. The statistical tools used are descriptive statistics, paired sample t-test.

RESEARCH METHODOLOGY

Sampling Technique: In the present study Convenience Sampling method has been used depending upon the availability of data. Such a selection represents the sample in a better way and reflects better relationship with the other variables.

Selection of the Sample: This empirical study analyses the financial data of selected firms in diversified sectors including Steel, Chemicals, Telecommunication, Information Technology, Automobile and Power for a period ranging from 8 to 10 years which were merged during the period 2000-2010.

Sources and Collection of Data: In order to judge the financial performance of the merging firms at least 5 years financial data is required. The required data have been collected from different websites.

Period of the Study: The year 2000-13 is considered as the event years to identify the major M&A deals in different industries and to compare the corporate performance on different parameters like liquidity and leverage standards.

Tools used for Analysis: The financial performance of the 7 sample merging firms before and after the M&A deal has been analyzed with the help of following ratios:

Table-1 (Ratios Used)

Type / Ratio / Formula
Liquidity Ratio / Current Ratio / Current Assets/Current Liabilities
Quick Ratio / Liquid Assets / Liquid liabilities
Leverage Standard / Debt-Equity Ratio / Long Term Debt/ Equity

DATA ANALYSIS

(i)Liquidity Analysis:Liquidity or short term solvency means the ability of the enterprise to meet the short-term obligations as and when they become due. An inability to pay off short-term liabilities affects the credibility of the entity. Short-term creditors are primarily interested in liquidity or short-term solvency of the enterprise since their claims are to be met in the short term. Continuous default on part of the enterprise leads to commercial bankruptcy which may lead to its sickness and dissolution.For liquidity analysis Current Ratio and Quick Ratio are used.

(a)Current Ratio:This ratio establishes a relationship between current assets and current liabilities. Current Assets refer to those assets which are held for their realization into cash in the normal course of business normally within a year. Current Liabilities are those liabilities basically incurred in the normal business operation and mature nearly within a year. The objective of computing this ratio is to measure the ability of an entity to meet its short-term obligations and to reflect short-term financial strength or solvency of business. It shows the safety margin available for short-term creditors.

Table-2 (Current Ratio)

Company Name / Before Merger / After Merger / D / D2
TATA Communication Ltd. / 1.715 / 0.86 / -0.855 / 0.731025
Dr Reddys Lab. / 4.675 / 1.62 / -3.055 / 9.333025
Graphite India Ltd. / 1.03 / 1.6675 / 0.6375 / 0.406406
HINDALCO / 2.183 / 0.862 / -1.321 / 1.745041
Mahindra Lifespace Developers / 1.37 / 3.8 / 2.43 / 5.9049
Aditya Birla Nuvo / 1.33 / 1.33 / 0 / 0
GTL Ltd. / 6.013 / 2.21 / -3.913 / 15.31157
TOTAL / -6.0765 / 33.43197

Source: Compiled & Computed Data

= -0.86807

= 2.1662998

= 0.8187844

= -1.060195

(b)Quick Ratio:This ratio establishes a relationship between comparatively liquid assets (Quick Assets) and current liabilities. The objective of computing this ratio is to measure the ability of the firm to meet its short term obligations as and when due without relying upon the realization of stock.

Table-3 (Quick Ratio)

Company Name / Before Merger / After Merger / D / D2
TATA Communication Ltd. / 1.995 / 0.85 / -1.145 / 1.311025
Dr Reddys Lab. / 4.015 / 1.673 / -2.342 / 5.484964
Graphite India Ltd. / 1.28 / 1.541 / 0.261 / 0.068121
HINDALCO / 1.973 / 0.5922 / -1.3808 / 1.906609
Mahindra Lifespace Developers / 1.445 / 1.585 / 0.14 / 0.0196
Aditya Birla Nuvo / 1.413 / 1.767 / 0.354 / 0.125316
GTL Ltd. / 6.223 / 2.501 / -3.722 / 13.85328
TOTAL / -7.8348 / 22.76892

Source: Compiled & Computed Data

= -1.11926

= 1.5275123

= 0.5773454

= -1.938627

(ii)Leverage Standard:

Leverage Analysis is the technique, which is used to quantify the Risk Return Relationship of different capital structure. Risk exists because of lack of certainty. Risk attached to the firm can be divided into two categories- Business Risk and Financial Risk. Business risk arises due to cost structure of trading or manufacturing particularly of fixed nature which are basically internal and also due to the nature operation the company is undertaking, for instance, risk of business cyclical fluctuations, technological obsolescence etc which are mainly of external nature. On the other hand financial risk arises due to inclusion of fixed cost bearing securities, like debentures and long term debts in the capital structure of an entity.

In the current article the data is analysed mainly on the basis of financial leverage arising out of financial risk with the help of debt-equity ratio.

(a)Debt-to-Equity Ratio:This ratio explains the extent of financial leverage in the capital structure of an entity. It is one of the basic principles of cost of capital and capital structure that “If you include debt financing in the capital structure without affecting risk perception of shareholders to certain extent, you can minimize the overall cost of capital of the firm simultaneously maximize the wealth of shareholders and value of the firm”. It has been analysed here to identify, whether the companies under consideration have been able to take higher financial risk after merger or not.

Table-4 (Debt Equity Ratio)

Company Name / Before Merger / After Merger / D / D2
TATA Communication Ltd. / 0.035 / 2.33 / 2.295 / 5.267025
Dr Reddys Lab. / 0.015 / 0.61 / 0.595 / 0.354025
Graphite India Ltd. / 0.526 / 0.615 / 0.089 / 0.007921
HINDALCO / 0.253 / 1.062 / 0.809 / 0.654481
Mahindra Lifespace Developers / 0.97 / 0.613 / -0.357 / 0.127449
Aditya Birla Nuvo / 0.353 / 1.361 / 1.008 / 1.016064
GTL Ltd. / 0.07 / 1.64 / 1.57 / 2.4649
TOTAL / 6.009 / 9.891865

Source: Compiled & Computed Data

= 0.858429

= 0.8882162

= 0.3357142

= 2.5570223

INFERENCES

  1. The tabulated value of t for 6 d.f. and at 5% level of significance for a two-tailed test is 2.447.Since calculated value of‘t’ is less than tabulated t, it is not significant at 5% level of significance. Hence, the data do not provide any evidence against the null hypothesis which may be accepted. We may, therefore, conclude that there is no significant improvement in the Current Ratio after the merger and acquisition.
  1. The tabulated value of t for 6 d.f. and at 5% level of significance for a two-tailed test is 2.447.Since calculated value of‘t’ is less than tabulated t, it is not significant at 5% level of significance. Hence, the data do not provide any evidence against the null hypothesis which may be accepted. We may, therefore, conclude that there is no significant increase in the Quick Ratioafter the merger and acquisition.
  2. The tabulated value of t for 6 d.f. and at 5% level of significance for a two-tailed test is 2.447.Since calculated value of‘t’ is greater than tabulated t, it is significant at 5% level of significance. Hence, the data provide evidence against the null hypothesis which may be rejected. We may, therefore, conclude that there is significant effect on leverage standards of the surviving companies after the merger and acquisition in the long-run.

FINDINGS

The main findings of the study are as follows:

  1. There is no effect on liquidity standards of the surviving companies after merger and acquisition in each sector under study in India.
  2. There is significant effect on leverage standards of the surviving companies after the merger and acquisition in the long-run.

CONCLUSION

From the above discussion it may be concluded that Merger and Acquisition has not achieved a good result in terms of Liquidity position. Companies from different sectors in India are not efficient enough to have a good liquidity position after the merger and acquisition. This study was undertaken to test whether there was any significant impact on operating performance on the outcome of merger and acquisition. The results from the analysis of pre-and post-merger operating performance ratios for the acquiring firms in the sample showed that there was a very negligible impact of merger.In terms of solvency position a very few companies are improving. There is a very small significant effect on leverage standards of the surviving companies after the merger and acquisition in the long-run. Merger and acquisition may not be fruitful to all companies in all times. The benefits of Merger and acquisition differs from Company to Company and from business to business. The success of Merger and Acquisition deals depends upon the efficiency of the managementand proper utilization of human resources.

REFERENCES

  1. Saple V. (2000) “Diversification, Mergers and their Effect on Firm Performance: A Study of the Indian Corporate Sector”, Review of Quantitative Finance and Accounting. Page No.67.
  2. Vanitha, S. 2006.Mergers and Acquisitions in the Manufacturing Sector: An Evaluation Study, PhD Dissertation, Bharathidasan University, Tiruchirappalli.
  3. Vanitha, S. and M. Selvam (2007).“Financial Performance of Indian Manufacturing Companies during Pre and Post Merger”, International Research Journal of Finance and Economics,Page No12:7-35
  4. Kumar, R., (2009). "Post-Merger Corporate Performance: an Indian Perspective", Management Research News 32 (2), Page No. 145-157.
  5. Pramod Mantravadi & A Vidyadhar Reddy (2008) “Post-Merger Performance of Acquiring Firms from DifferentIndustries in India”, International Research Journal ofFinance and Economics, ISSN 1450-2887
  6. Dr. Salma Ahmed & Yasser Mahfooz (2009),“Consolidation in the Sky - A Case Study on the Quest for Supremacy between Jet Airlines and Kingfisher Airlines” Working paper series Aligarh Muslim University
  7. Dr. Neena Sinha, Dr. K.P.Kaushik & Ms. Timcy Chaudhary, (2010), “Measuring Post Merger and Acquisition Performance: An Investigation of Select Financial Sector Organizations in India”, International Journal of Economics and Finance Vol. 2, No. 4; November,2010
  8. N. M. Leepsa & Chandra Sekhar Mishra, (2012), “Post Merger Financial Performance: A Study with Reference to Select Manufacturing Companies in India”, International Research Journal of Finance and Economics ISSN 1450-2887
  9. Sunil Kumar (2013), “Impact of substantial shareholdings on Synergy Creation in Post-mergers and Acquisitions Period”, The Indian Journal Of Commerce, Vol.66,No.1, January-March,2013

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