Trends and Perspectives on Corporate Mergers in Contemporary India

Author(s): P. L. Beena
Source: Economic and Political Weekly, Vol. 43, No. 39 (Sep. 27 - Oct. 3, 2008), pp. 48-56
Published by: Economic and Political Weekly
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Trends and Perspectives on Corporate Mergers
in Contemporary India

P L BEENA

Theand
co
the
growt
cen
Throu
reg
corpor
feat
incl
foreig
fere
saw a
the
macro
fin
third
cre
[unctad 2000].
overse
The Indian evidence suggests that the new economic environ-
A larg
ment has facilitated m&as since the 1990s. In the first wave of
belong
m&as (i e, 1990-95), the Indian corporate houses seem to have
lines
been bracing up to face foreign competition while the second w
blocks
wave since 1995 experienced a significant involvement of multi-
national firms. Evidence shows that almost 40 per cent of the inflow
firms
of foreign direct investment (fdi) into India during the second
that o
half of 1990s came through cross-border m&as [Beena 2001b;
sector
Sana 2001].
eviden
It is argued that merger bids by multinationals accelerated in
India since the mid-1990s as a result of mismanaged financial
of var
sector reforms [Khanna 1999] as well as higher interest rates
compa
consequent on poor macroeconomic management [Basant and
that
Morris 2000]. Kumar (2000) argued that such mergersit have
potential
M&A damaging consequences for capital formation, the a
balance of payments, technology transfer and competition. The
approp
factors influencing foreign acquisitions by Indian firms could be
as to a
to gain market access for exports, horizontal or vertical integra-
overse
tion, capture of brand names, access to technology and global
leadership aspirations [Nagaraj 2006; Nayyar 2007].
among
An attempt has been made in this paper to understand the
motives and implications of the merger wave in India during
the second half of
This the 1990s. is
The choice of our period of a
analysis was subject to the availability of adequate information
Thiruva
P Moha
relating to the performance variables of a period of five years
R Nagar
before and after m&as. The analysis has been conducted in a
for prov
comparative perspective by classifying the acquiring firms into
K Kris L
two categories in terms of ownership, namely,va
their Indian-owned
by and foreign-owned.
part The paper is divided into six sections:
Barbara
(1) policy reforms and trends of m&as, (2) theories on motives
C P Cha
and implications of m&as, (3) sample, data and methodology,
errors o
(4) impact of m&as on the performance of acquiring firms,
P L Been
(5) source of financing and some plausible issues for corporate
Studies,
governance, and (6) conclusion.

48 September 27, 2008 GXJ Economic & Political weekly

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 -=-

1 Policy Reforms
(sebi) under the sebi Act, 1992 which was responsible for fram-
Before embarking
ing guidelines and rules regarding many aspects of corporate o
the context of
behaviour, sebi came out with the
a regulation namely, the regula- s
made m&as possible
tion on substantial acquisition of shares and takeovers, in 1994.
India during
This regulation was further revised inthe
1997 [Government of India 19
an anti-trust or
1999]- The acquirer appoints a merchant banker (mb) who has co
restrictive
been registered with sebi provisio
before making a public announcement
Practices(pa). The pa is required to be made through the said mb.
(mrtp) The
Act
prises, amalgamation
acquirer is required to make the pa within four working days
acquisition of
of entering into an agreement forei
to acquire shares or deciding to
removed. This
acquire shares/voting was
rights of target company or after any such d
tions hampered
change or changes as would result in change in control over the
the
of target company. In case of indirect acquisition
technology requi or change in
had become
control, the pa is made byimperat
the acquirer within three months of
Foreign consummation of such acquisition or change in control or
Exchange R
in early 1993
restructuring with
of the parent or the company holding shares of or t
restricting
control over the target foreign
company. The offer price in these cases is
active role in
determined with reference prom
to the date of the public announce-
with respect to
ment by the parent company and the date bor
of the public announce-
well as taking over
ment for acquisition of shares of the target company whichever is
higher, in accordance
removed. Indian with the parameters mentioned in the co
to start takeover regulations [sebi 2006].
joint ventur
companies
It is now clear - someth
that the structural adjustment programme and
initiatives in
the new industrial regime adopted by thethe
government of India f
New capital issues
allows business houses to undertake, without restriction, any
mutual funds
programme of expansion either by entering into aand
new market
been allowed to
or through expansion in an existing market. While taking ent
into
Notes, account the asset size to define the threshold The
1993). limit for monitor- F
was introduced in
ing, the provision in cci has not taken into account the factor of
percent market share. Thisthe
of loosely defined provision proc
seems to have
Global enough potential for abuse of power through market share
Depository
[Chandrasekhar and
companies 2003]. However, measuring the market share
direc
owned subsidiaries
of different product lines at the global level has become a more
Indian complex task now.
parties inve
ted to invest $sector 10
A substantial growth of m&as in the Indian corporate
$ 50 million.
has been witnessed since the 1990s. For instance, The
the total number
Indian firms
of m&as has sharply increased to Tablt to
1: Trtnds of M&As between
inv
their 1,370 during
net 2000-2006 from 1990 and 2006
worth wi
291 during 1990-95
condition (Table 1). It is Year Mergers Takeovers Total
[Gopinat
also evident that this trend has
Historically, 1990-95 diffe
236 55 291(20)

half1995-2000 425 311

been sharper since the latter in
frameworks orde736(236)
2000-06 897 473 1,370
tion. of the 1990s.
The A large share of
number o
1990-06 1,558 839 2,397
m&as was in the manufacturing
competition law has
Source: (1) Monthly Review of the Indian
[cuts 2003 as
sector throughout this period. Economy cited
(CMIE); Department of Company
Affairs, Research and Statistics division,
Policy The policy shift that2002
Act, facilitatedNew Delhi and SEBI web dec
site. (2) Figures in
brackets represent the number of
India m&as has had implications
(cci), which formultinational corporation-relatedha
deals.
and various industry groups. Our
reverse merger
practicesstudysuch
observed that firms in beverages,
as spirits
carand vineg
to checkcial and
theother services, chemicals,
abuse drugs and Pharm
vent combinations cement, tea, electrical machinery and electronics u
se
detrimental to the consumers' interest. All m&as in which the had a relatively higher involvement in m&as activit
joint turnover of the companies involved is greater than Rs 3,000 share of m&as during the second half of the 1990s w
crore or with a combined value of assets of more than Rs 1,000 mergers, i e, between firms belonging to related ma
crore will be referred to the cci [The Gazette of India 2003]. [Agarwal 2003]. This may go to indicate that the same
While deleting regulatory provisions under the mrtp Act, the strengthening the controlling block as witnessed durin
government set up the Securities and Exchange Board of India half of the decade [Beena 2001a] is found repeated d

Economic & Political weekly DBS! September 27, 2008 49

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REVIEW OF INDUSTRY AND MANAGEMENT - ~ - -

second half as well.2 collective

The organisational
deals relating to m&as sh
dominantly mutual
horizontal confidence
rather and that
than vertical in n
national Corporations Coase
(mncs)(1937)
havehighlights the
actively parti
m&a process during tions
the between
second halffirms in 1990s
of the the m
it is observed that 32 as
perthere
centis
ofdifficulty in wri
m&as during 1
MNC-related deals. should
The happen
increasing in future
interest sit
of mn
services, advertising, 97]. Conversely,
travel it other
agencies and has been
bus
is notable. Consumer lead toindustries
goods inefficient outcomes
such as fo
ages, household regard
appliances, to the allocation
Pharmaceuticals of
and
products, outcomes
automobiles and from
the like havebargaining
had a high
of MNC-related deals. Hart-Moore
Two-fifths paradigm
of them [B
involved
local partners in joint Mergers
ventures inup
set general can
in India or le
ra
of mncs [Kumar 2000; efficiencies
Saha 2001]. and transaction
A recent study
the foreign acquisition of
byscale and
Indian scopehas
firms possible i
increas
2004 to 130 in 2005 greater
[Gopinath control over key ti
2007]. According
Ficci (as cited by bining
Nayyar marketing,
2007), advertise
the number of f
tions by Indian firms ting down
during overlapping
January res
2000 to Jun
Almost 48 per cent of Ansoff
the total and Weston
value 1962].
of Indian acqu
was in the cost-reducing
manufacturing sector sucheffect of a
as pharmac
mobiles, steel, probably
chemicals outweigh
and consumer its collu
goods. W
tion technology (it) (1968)
and argued that a small
telecommunications acc
per cent of the total offset
value ofby a large
Indian increase in
acquisitions
cent of these tionwere
acquisitions that in
sets
theprices abov
industrial
such as the United mergers
States (us) andas efficiency
the enh
uk. Significa
made 43 per cent of mergers,
the in general,
total Indian in a po
acquisitions
the corresponding period
[Nayyar 2007: 11].
(ii) Mergers as Enhancing
2 Theories on Motives and Implications
immediate effect of a of M
merg
A merger or tration
amalgamation as it
results reduces the num
in the combinat
more companies into ers wherein
one, on competition is on the
the merging ent
identities by being cial barriers
absorbed into thecan be raised
merged o
entit
vestment is made in a this
through strengthening of produ
process. However,
shares takes place in designs,
between patents
the entities and kn
involved i
ess. Generally, the that it which
company makes survives
more sense fo
is th
retains its identity, than
and theto engage
seller in a mutuall
company is ex
acquisition, on the maximise
other hand, is profits
aimed at[Bhattac
gaining
interest in the share is not of
capital well accepted
the acquiredas th
comp
enforced through an prédation.
agreement Such
with theory
the sug
persons
jority interest in the distinct possibility
company's management and that
or th
ing shares in the open pricing tactic
market or needs to
purchasing newbe
vate treaty or by minimum
making costs
a takeover to the
offer to preda
the g
shareholders [Ramaiya consumers
1977]. The [Bhattacharjea
theories on m& 2
the terrains of lopment
industrial of an active
organisation, market
financial
international business managers
studies. It
tohas been pointe
"empire build",
trends of m&as can power
be but also
theoretically to progre
traced back
motives for mergers takeover by
emphasised bybecoming large
industrial org
ries (i e, market [Beena
power 2001a; Singh
and defensive 2003].
reactions)
economics literature (i potential for ego)
e, managerial monopolistic
and inter
ness research (i e, have continued
access to marketsto exist in th
or techn
Cant well and in the
Santangelo integrating
2002]. global e
We may classify
theories into four We also (i)
categories refer to this herein
efficiency-enhan
(ii) concentration developing
and country like (i
monopoly-enhancing, I
macro-economic Hart
changes, and
and (iv)Moore
driven(1990) view
by financ
approach that ownership of
(i) Mergers as
Efficiency Enhancing
control Measures:
rights over the use
backward integrationever way vertical
through the owner likes
merger

50 September 27, 2008 O229 Economic & Political weekly

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 REVIEW OF INDUSTRY AND MANAGEMENT

contract [Bolton and Schartstein 1998: 98]. Berle and Means

size is the same as that of the incumbent firm acquired" [unctad
(1932) argued that the separation of ownership and control may1997: 141]. The actual impact of an acquisition on competition
depends upon the marketing strategies of tncs, as well as on
lead managers to pursue their own objectives at the expense of
owners. However, they also argued that the diffuse equity owner-
industry and country-specific circumstances [Dunning 1993].
ship can also make managers to run the firm to their own benefitsThe risk that cross-border m&as may reduce competition tends to
at the expense of investors [Bolton and Schartstein 1998: 100]. be greater in those industries in which shrinking demand and ex-
The motives behind transnational or cross-border acquisitionscess capacity are important motivations for m&as and in countries
differ from those, that drive purely domestic acquisitions. An ac-
in which competition policy does not exist or where its implemen-
quiring firm might decide to go in for an international merger tation
in is weak [Zhan and Ozawa 2001: 61]. In sum, m&as as con-
order to take advantage of cheap raw materials and labour, to
centration enhancing and building oligopolistic market power is a
capture profits from exchange rates, or to invest its surplus cash
rather familiar view in studies on mergers internationally.
[Weston et al 1996]. Horn and Persson (2001) showed that inter-
(iii) Mergers as Driven by Macroeconomic Changes: m&as are
national mergers may arise due to lower trade costs, contrary to
the "tariff jumping" argument. Lommerud et al (2005) argued
undertaken to compensate for instabilities such as wide fluctua-
that oligopolistic competition in the presence of plant specific
tions in demand and product mix, excess capacities related to
trade unions raises the incidence of international mergers. The
slow sales growth and declining profit margins, and technologi-
cal shocks [Post 1994; Weston et al 1996]. Firms may pursue
study explained that unions are plant specific in the international
m&as for the sole reason of growing in size as size, more than
setting and hence international mergers are profitable because
wages decrease after the mergers. Neary (2004) showed that in-
profitability or relative efficiency, is considered to be the effective
barrier against takeovers [Singh 1975, 1992]. Macroeconomic
ternational differences in technology generate incentives for
changes become the context or provide opportunities for m&as.
cross-border mergers in which low-cost firms from one country
Mergers may also be resorted to as defensive measures in re-
take over high-cost firms from another country. Qiu and Zhou
sponse to major policy shifts. Andrade, Mitchell and Stafford
(2006: 40) have theoretically shown that a merger raises con-
(2001: 104) argued that the "decade of deregulation" during the
sumer surplus and social welfare if and only if products are suffi-
1990s caused m&as in us. The study shows that industry shocks
ciently differentiated. The study further argued that interna-
are a primary source of takeover activity. Similar findings were
tional mergers should be encouraged when demand uncertainty
is large and market competition is intense as they are privatelyobserved by earlier studies as well [Mitchell and Mulherin 1996].
While there are firm-specific motives for undertaking cross-
unprofitable but socially desirable. However, international merg-
border m&as, there are also economic forces that have acted to
ers should be discouraged in the opposite conditions, where firms
encourage the cross-border m&as, such as the economic integra-
have incentives to merge but such mergers reduce social welfare.
tion of the eu and the formation of the North American Free
Based on the linear/Cournot framework, Bhattacharjea (2003:219)
Trade Agreement (nafta) represented by the creation of a
argued that if the existing trend with the domestic oligopolies
common market [Caves 1991; unctad 1997]. A view relating
is not towards export orientation, mergers by foreign firms
macroeconomic changes to merger moves is particularly relevant
can have the effect of reducing the welfare gains from the angle
of self-reliance. in the context of transitional economies and developing countries
under neoliberal reforms.
The entry and subsequent activities of multinational firms affect
the structure of markets for goods and services in host countries
(iv) Mergers as Driven by Financial Motives: Firms adopt
in several different ways. Numerous studies for individual
developing countries as well as developed economies indicate m&as
a as a route to growth whenever alternative investment op-
portunities for financing corporate expansion in specific environ-
positive association between tnc activities and the concentra-
tion of producers in host country industries [unctad 1997: 137].ments become less attractive. Availability of capital to finance
International m&as may be regarded as a new cross-border
acquisitions and innovations in financial markets such as junk-
bonds can also be among the reasons for cross-border mergers
strategy that aims at increasing corporate global competitive-
ness by pursuing related diversification and by integrating
[Sudersanam 1995]. The valuation differences of the share prices
or economic disturbances lead to acquisitions of firms that are
affiliates into a global network [Cantwell and Santangelo 2002].
low valued from the viewpoint of outsiders [Gort 1969]. Lower
Sanjaya Lall rightly questioned whether the positive economic
interest rates also lead to more acquisitions, as acquiring firms
effects that cross-border acquisitions can have, outweigh the
rely heavily on borrowed funds [Melicher et al 1983]. It is also
concerns they arouse [Lall 2002]. Some qualifications and excep-
argued that the undervaluation of the dollar vis-a-vis pound
tions have also been pointed out about this trend. "Greenfield
and yen in the early 1980s had resulted in some very substantial
investment" in new production facilities adds to the number
of firms engaged in the production of a good or service and acquisitions
it of assets in the us by British and Japanese firms
might reduce or at least leave unchanged the concentration [Dunning
of 1993]. The currency devaluations in the crisis-affected
producers in an industry. In contrast, "fdi entry throughcountries
a as well as falling property prices reduced the foreign-
merger or acquisition would increase the concentration ofcurrency costs of acquiring fixed assets in those countries and
producers if a merger or takeover results in increased sales for
provided a golden opportunity for tncs to enter the local markets
[Zhan and Ozawa 2001]. Hay and Liu (1998) have shown the
the newly created foreign affiliates; or leave it unchanged, if its

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 REVIEW OF INDUSTRY AND MANAGEMENT

crucial role of
m&as. Many financ
of these firms are n
Our sample
acquisitions, was further reduced
especially
loped by Jensen
only (198
those firms, for which th
clearly the Prowess database,
pointed out for ho
the en
m&as It is indeed
during thea matter of concern
first
study able regarding
argued that other in
foreign-ow
m
could buying
have beenout joint ventures
the alre
de
the firm through
through a
cross-border m&as.4 v
of firms Out of
to the total sample the
exploit cases ch
liberalisation buoyancy
per cent were horizontal m&as, w
not be erate mergers. Another
surprising if11 in
per c
have
capitalism, considered product-group
financial mo
m&as in dence
our of at least one merger or
country. P
enormous When we classify the whole
growth of samp
a
has been
productive base distributed
of into 52 cate
the
ades). However, the
The main objective li
of this paper
structure any significant
of thedifference in the
global
tives of post-merger
m&as inphases. We have al
India
further significant difference in the per
exploration.
Our ing 1990-2005 as compared
classification of to t
t
m&as manufacturing
throws light sectoron
as a whol
o
Each of them
grouped theis
total true i
m&as that occu
specific groups, domestic
studies m&as and c
that cr
these sets whether
of there is any significant
arguments
between the pre- and post-me
3 Sample, Data and Methodology looked into whether there has b
We have constructed our own list of m&as by compiling informa- performance between the two af
tion available from different sources. The list of amalgamations/ The study has tested the signifi
mergers was collected from the division of research and statistics applying the non-parametric,
of the department of company affairs and the list on takeovers was [Sidney Siegel 1956]. We have co
collected from the Monthly Review of Indian Economy published ance of a period of five years befo
by the Economic Intelligence Service, Centre for Monitoring Indian our sample.5
Economy (cmie) and also cross-checked with the list provided by The choice of our sample was subject to the availability of
sebi. However, our sub-sample for the following analysis consistsadequate information relating to the period of analysis from the
of only 115 actual m&as which accounts for 22 per cent of the total Prowess database. The performance has been measured in terms
number of m&as that occurred in the Indian manufacturing sec- of price-cost margin, rate of return, shareholders' profit, dividend
tor during 1995-2000 (Table 2). It consisted of 84 domesticallyper equity, debt-equity ratio, export intensity, research and
owned acquiring firms and 31 foreign-owned acquiring firmsdevelopment intensity, capacity utilisation, product market share
and the Herfindal Index of Concentration ratios. The variables
Table 2: Sample of Acquiring Firms Involved in M& As Process in 1995-2000
(Assets in Rscrore) were extracted from the Prowess database of the cmie, and the
Year Domestically-owned Foreign-owned All Acquiring Firms
Acquiring Firms Acquiring Firms
'Size and Market Share' data published by cmie.

4 Impact of M&As on the Performance of Acquiring Firms

1995-96

1996-97 6,771.82 15 5,445.10 7 12,216.92 22 We observed that the profitability ratio in terms of rate of return
1997-98 9,342.03 16 856.81 4 10,198.84 20 (pbt/tce), price-cost margin (pat/ns) and shareholders' profit
1998-99 1,27,217 13 1,225.69 4 1,28,442.69 17 (pat/nw)6 of all acquiring firms has either remained stable or
1999-2000 41,267.39 34 4,463.42 9 45,730.81 43
declined during the post-M&As period as compared to the pe-
Total
riod before m&as (Table 3, p 53). And this is statistically signifi-
Source: Prowess Database, CMIE. Bombay. Assets = Total Asset.
cant at 1 per cent level.
The debt-equity ratio of all Acquiring
involved in m&as in the manufacturing sector firms has decreased afterthis p
during
m&as and itMNC-related
Our sample includes only those is statistically significant atacquiring
the 5 per cent level firms
were already operating in India
(Table 3). Theas
declining
foreign
trend in the debt-equity
subsidiaries.
ratio shows that
We have considered only the capital structure
those firms could become relatively viable
which have during the
gone in
m&a deals during 1995-2000post-merger
for the phase. purpose of our analysis s
our sample can provide information related
The r&d intensity of majority to firms
of the acquiring the perform
has declined
indicators for five years before and
after merger and it isfive years
statistically significant atafter the
the 1 per cent level. conce

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 = - = -

Further, it is noticed
private that
corporate man
for all the foreign-owned
acquiring firms acq
has
merger, compared
which is to Indian-o
significan
study shows that
From the the capa
pre- and pos
assets) has declined
that the return dur
on s -
significant increased
level of after
5 per the m
cen

Table 3: Financial
same ratio for
Behaviour of
all firm
Acquir
Performance the period
Indicators 1990-2005
Types of M&
(%) (%) (Wilcoxon- Performance of
rank Test) Acquiring Firms private corporate ma
during 1990-2005
tively high for forei
their Indian counterpa
1

Rateof return Domestic M&As 14.6 4.8 -4.56(.O) 11.5

MNCM&As 16.1 26.1 -1.18(.85) 31.4 firms has decreased af
during 1990-2005 is re
Price cost margin Domestic M&As 0.3 -18.3 -3.64(.O) -9.5 the private corporate
MNCM&As 2.4 1.5 -1.114(.265) 2.3
Total 1.3 -8.4 -3.76(.O) -3.6(11.6)
even lower for the f
Shareholder's profit Domestic M&As 15.2 1.9 -2.74(.006) 9.69 domestically owned fi
MNCM&As 11.2 1.6 -2.97(.003) 12.3 all firms involved in m
Total 13.2 1.7 -3.98Ç0) 10.9 (NC)
manufacturing sector,
Dividend per equity Domestic M&As 23.9 49.9 .00(1.00) 33.05
this strategy in order
MNCM&As 29.8 55.2 -.385(70) 44.67
We have further loo
Gearing ratio Domestic M&As 1.03 1.77 -1.16 (.25) 1.59 these acquiring firms
MNCM&As 3.85 1.79 -3.46 (.001) 1.29 capacity utilisation a
done in a comparative
(1) Figures in bracket of column 5 represent P -value
(2) Figures in bracket of categories
column 6 again,
represent nam
for the
(3) nc is 'not calculated'.
m&as involving forei
there are any differen
Table 4: Economic Behaviour of Acquiring Firms (Ratios in %)

Indicators Type of M&As Pre-Merger Post-Merger Z-Statistics Average during the pre- and
(Wilcoxon- Performance of
rank Test) Acquiring Firms
intensity (i e, the rati
during 1990-2005 following trends: the
1
domestic and foreign
Capacity utilisation Domestic M&As 91.6 83.4 -2.05(.04) 90.5 the private corporate
MNCM&As 113.8 104 -1.64(.1O) 109.4
period 1990-2005.
r&d intensity of dom
Export intensity Domestic M&As 19.3 16.1 -1.74(.O8) 15.7
higher than that of f
MNCM&As 12.6 16.37 -1.114(.26) 14.6
2005 (Table 4)7 The r&d
Total

R&D intensity Domestic M&As 1.3 .19 -2.92(.004) 0.65

has declined after me
MNCM&As 0.1 0.26 NA(.064)a 0.19 sales) of all acquiring
higher than the private
(1) Figures in bracket of And
column this
5 ratio
represent was sl
P-value.
(2) Figures in bracket of column 6 represent for the Ind
(3) a - Binomial acquiring
distribution used. firms as com
Further, it is noticed t
Table 5; Distribution of Acquiring Firms in Terms of Market Structure
all acquiring firms has
Acquiring Firms Major Herfindal Index Ranking of Market Share
Product Concentration of ' Market Share Table 4 shows a simil
Groups Major Product Groups as in 2001
Number Number Increased Decreased 1-5 6-10 Above 10 Increased Decreased related acquiring firm
ity utilisation ratio10
78 the post-acquisition p
Source: Industry Market Size and Shares, CMIE, August 2002.
acquiring firms as co
From the pre- turing
and sector.
post-merger perfo
noticed that the Fromon
return our analysis of
shareholders'
has increased shares
after in the period
the merger 1
althoug
significant. share of the majority
Our analysis has further sho
of acquiring firms owned
were acquiring
paid fir
better return
to win the majority
shareholders' of these acqui
confidence in th
However, the five players
performance of in their
the re
acquir
the ing
above-mentioned observationratios
profitability is tha
has been those
relatively industries
better wher
as compared

Economic &Political weekly GEB3 September 27, 2008 53

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increased during this period. These industries are automobile an- As for external sources of financing with acquiring firms, current
cillaries, cement, spun yarn, drugs and Pharmaceuticals, tea, and liabilities accounted for the major share of up to 30 per cent in
synthetic detergents. 2005, compared to 17 per cent in 1995. Similarly, borrowing ac-
Let us now conclude this section. The profitability indicators counted for 38 per cent in 2005, up from 22 per cent in 1995. Re-
are showing a statistically significant stable or downward trend source mobilisation from the capital markets by acquiring firms
during the post-merger period. Our analysis has further shown suffered a drastic fall from 34 per cent in 1995 to nearly 7 per cent
that the shareholders of acquiring firms were paid better returns in 2005. The decline in resource mobilisation from the capital
as dividends, probably, to win the shareholders' confidence in the market in the corporate sector as a whole from 16 per cent in 1995
post-merger phase. However, statistically this trend has not been to 5 per cent in 2005 was also marked. However, the Indian corpo-
proven significant. Although it is not statistically significant, the rate sector mobilised relatively a large proportion of total re-
declining trend in the debt-equity ratio shows that the capital sources from internal sources in 2005, as compared to 1995.
structure could become relatively viable during the post-merger This new trend of internal financing of the corporate sector
phase. This may point towards the plausible tactic of the firms conforms to the so-called "pecking order" theory of financing
using a merger as the occasion for enhancing equity in order to corporate growth (as experienced in the developed and emerg-
mobilise capital through borrowings to further their modernis- ing economies). It suggests that firms resort to financing their
ing activities [Beena 2001a]. The post-merger performance in investments from internal sources in order to maintain family
terms of export intensity in India showed a significant upward ownership and control of corporations [Singh 2003]. But what is
trend, which coincides with the recent evidence from countries surprising is that a high level of depreciation accounts for the major
hit by financial crises.12 Agarwal (2003) argued that firms with share of internal sources of finance in 2005. For instance, the
the "expansionary motive" of using excess capacities resort to share of depreciation in total sources of finance in the Indian
the tactic of mergers. However, our evidence points to the corporate sector was 52.5 per cent in 1976-77, decreased to 20.12
contrary, as capacity utilisation during the post-merger phase per cent in 1990-91 and then further to 12.4 per cent in 1995-96
shows a statistically significant downward trend. Lastly, it is [Rajagopalan et al 1989: 8; Dennis Rajakumar 1996: 203]. Since
rather commonplace to point out that increasing concentration then, this share has been increasing continuously reaching 28 per
enables firms concerned to set mark-up prices above competitive cent in 2005 (Table 6). Does such a high level of depreciation ac-
levels. However, our recent evidence in the case of India shows a tually reflect a higher rate of obsolescence of plant and machinery
mixed trend: The price-cost margin has not gone up significantly during "liberalisation"? If it were not the case, the matter would
during the post-merger period although the product market need attention from the angle of corporate governance. Moreover,
share has gone up in a majority of the firms that have gone in for despite showing a declining trend in profitability (as in Table 3),
mergers. Section 5 briefly analyses the sources of financing of the dividend pay-out per equity has been increasing and would,
these acquiring firms. once again, merit attention from a corporate governance angle.13
By the end of 1995, the post-liberalisation buoyancy in the Indian
5 Sources of Financing and Issues for stock market generated finances for the acquiring firms [Beena
Corporate Governance 2001a]. However, in 2005, mobilisation of resources from the
An earlier analysis [Beena 2001a] of the major sources of funds of stock market showed a disturbingly declining trend for the ac-
the sample of 34 firms involved in mergers during the first phase quiring firms and the corporate sector as a whole (Table 6). Once
(1990-95) shows that 71 per cent of the total assets of the acquir- again, this calls for attention from the angle of regulation.
ing firms in the period 1989-90 to 1994-95 was mobilised from
6 Conclusions
external sources. The capital market accounted for 33 per cent of
the total funds acquired and current liabilities for another 21.8 The evidence suggests that the new economic environment of the
per cent. Only about 16 per cent of the total funds were mobilised 1990s has facilitated m&as between companies under domestic
through borrowings. However, firms that were involved in mergers or foreign ownership. Firms under the same business groups and
during the second phase (1995-2000) have changed their corpo- similar product lines dominated the merger wave. The average

rate financing Strate- Table 6; Sources of Finance (in %)

performance of acquiring firms based on all indicators during
gieS as iS evident from Acquiring Firms Corporate Sector
1990-2005 was relatively better than that of the manufacturing
Table 6. For instance, sector as a whole. However, the study could not find significant
acquiring firms were ^^ evidence of improvement in their performance in terms of vari-
, .. a Retained profits 18.01 14.14 15.7 27.6
depending , r .. ° more on ex- - ous parameters during the post-merger phase, as compared to
r ° b Depreciation 9.55 5.85 12.4 28.1
ternal financing in 1995. „ Externai the pre-merger
72.44 79.74 phase and this observation is quite consistent
72 44.7
with
Among these, the capi- a Capital market earlier
33.68 findings
6.66 15.6 related
5 to merger waves [Beena 2001a;
tal market accounted (Of which share Beena 2004]. Similar findings were arrived at by other studies as
for 34 per Cent and premium) well for the Indian corporate sector [Agarwal 2003; Mantravadi
borrowings accounted b Borrowings
and Reddy 2007].21.85 37.49 31.8 8.3
for 22 per cent But there c ^urrent''ab'''t'es
To draw parallels at16.89 30.11 level,
the international 24.6an 29.6
examination of
is, Source:
a change in corporate
Prowess Database and corporate sector, CMIE,
Tolal
the effect of mergers10° 10°in 10°
on profitability 10^
six countries showed that
financing , by 2OO5. June 2OO3 and May 2007. mergers had no effect on profitability or led to minor increases in

54 September 27, 2008 DQS3 Economic & Political weekly

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 Belgium, Ger
mained unch
1987]. Ikeda
improved th
Japanese man
dent that th
crisis-hit cou
that profita
Latin Americ
agement in
2001: 55-56].
uk does not s
units which a
utilised mor
A considerab
ning 60 years
hypothesis th
Only two out
improved pe
concluded th
[Utton 1974].
uk [Dickerson
not identify
BothUtton (1
vitch (1981: 1
oligopolisatio
welfarist im
that a nation
welfare-redu
also Qiu and Zhou 2006: 40]. daily, in the case of cross-border m&as.

notes
is traini
the am
in [Been
unrelate
1 European
8
U
The
4 The list
which came in
ster
through w(
tended toenced
disco
billion has
der to maintai
2000. A
R&D rea
the new policy
conducted
merg
protects
MNCs mino
in I
9 In f
cross-border
identify m
have
the United
firms, K
bas
the d
foreign.
ment purch
of c
high
and Santangel
dresses we
not y
mitted
ed,in Europ
letter
Patib
declining
not indu
contact
10 Thi
aged for
190 the
respon
'national used
champb
companies
effect
US, merger
although po
t
argue
laws to contro
panies fro
11 The evidence based on the crisis-hit countries
Robinson-Patm
M&As. It i
ing, were
the showed
end that TNCs had acquired
desi local firms that o
regardless
list were
of competing with them
of in the same
MN market prior e
2 By to the acquisition
related
licly acces[Zhan and Ozawa 2001: 159!- m
which 12 Thirty-six per cent of the acquired firms in crisis-
either
formation in
terms5 of
For
hit countries showed an
othe
the
increase in exports after p
composition
the the acquisition while 8 per cent of the acquired
perfor o
clearly
have firms showed
identif used a declining trend in their exports t
business
mance after acquisition
group [Zhan and befo
Ozawa 2001: 55].
been6 13 Corporate governance meant to create some rules
extracted
PPBT/TC
and other
tal and regulations which
capital docu would ensure that external
in the
a merger
ratio investors and creditors in a firm
of can get their n
3 as a
Vertical money back and would notmer
ratio simply be expropriat- o
order7 toed by those
This who are managing theis
achie firm [Shleifer n
served
control overand Vishny 1997]. a so si
tion 14 Whereas, "event" studies in the context of the US
affiliates
towards mt
study
acquistions and the UK have shown founsubstantial
invo gains to the
to a dia shareholders
have
similar in the acquired firms [see Hay
pr and sm
omies of Liu 1998:144)-
over scale.and m

Economic & Political weekly QBEH September 27, 2008 55

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 REVIEW OF INDUSTRY AND MANAGEMENT

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