Does Merger Type or Industry Affect Operating Performance of Acquiring Firms? A Long-Term Merger Performance Study in India

Abstract

Mergers and Acquisitions (M&As) are being increasingly used the world over, for improving competitiveness of firms through gaining greater size and/or market share, broadening the product/service portfolio, reducing business/financial risk, entering new markets and geographies, and consolidation for achieving economies of scale etc. While there has been lot of hype and hope around mergers, and research about stock market reactions to such announcements, it is important to examine, if merging with other firms in same or other industries, actually improves the financial operating performance, for justifying such merger activities. This research study has aimed to study the impact of mergers on the operating performance of acquiring firms, by examining pre-merger and post-merger financial performance ratios, using the sample set of publicly traded acquiring firms in India between 1991-2015. Further, the sample has been segregated to study the impact for 1) mergers occurring among different industry segments, and 2) mergers between acquiring and acquired firms belonging to same industry (horizontal or vertical), or between firms in unrelated industries (conglomerate). The results from the analysis suggest that there are variations in terms of impact of mergers on operating performance, in different industry sectors in India. In particular, there was a positive impact on profitability for acquiring firms in the Banking & Financial Services industry, while the impact was significantly negative for mergers in Sugar & Agri-Products, Pharmaceutical and Textiles Sectors. The impact was mildly negative for Chemicals Sector, and mixed impact for the other sectors. Also, mergers seem to have caused significant decline in returns performance for horizontal mergers, while the impact has been neutral for vertical and conglomerate mergers.