An Examination of Success of Mergers and Acquisitions in Manufacturing Sector in India Using Index Score

Abstract

Managers have to take various decisions when it comes to company performance in relation to M&A. The performance of manufacturing companies is influenced by simultaneous impact of number of factors. From the literatures on M&A, it is found that there are vast number of studies in different countries on the performance evaluation of companies involved in mergers and acquisitions in various sectors. From the literature, it is observed that various financial ratios are used to examine the impact of M&A. Essentially the studies measure the impact in terms of increase or decrease in particular financial ratio in post M&A period compared to pre M&A period. However, it is possible to get mixed results i.e. as per some criteria of performance, the impact can be positive and as per some criteria the impact can be negative. Therefore, the challenge is to develop a scientific approach that would deal with the multiple financial ratios. Thus, the objective of the study is to find out the factors affecting post mergers and acquisition performance of the manufacturing companies in India using a composite score that provide more stable measures of the underlying abilities of financial ratios (Anglim, 2009). In this study, a composite index score is developed using Principal Components Analysis for the pre and post M&A period separately by taking into account different financial ratios. The period of study is from 2000 to 2008. The dependent variable is the index score and the independent variables are M&A Experience, Industry Relatedness, Size of Acquirer, Method of Payment, pre M&A quick ratio, return on capital employed, total debt ratio, and interest coverage ratio. It is found that the determinants of M&A success and failure are the pre M&A return on capital employed, pre M&A total interest coverage ratio and pre M&A quick ratio.