Financial performance analysis of mergers and acquisitions: evidence from India

摘要

Purpose - The purpose of this paper is to investigate the impact of mergers and acquisitions (M&A) on corporate performance. It addresses the major question related to the long-term performance of the acquiring firm. Design/methodology/approach - The paper uses the long-term pre- and post-merger financial data to investigate the long-term performance. It compares performance of the acquiring firms before and after M&A. The present work conducts a comprehensive ratio analysis of 14 major ratios related to profitability, efficiency, leverage and liquidity. To ascertain the sources of the better long-term post-M&A returns, the present work decomposes the measure of operating performance into its constituents in terms of Du Pont analysis. Findings - Taking a sample of 305 M&As during the period of January 2003 to December 2008, it has been observed that there is significant improvement in the profitability of the acquiring companies involved in M&A. The results pertaining to profitability, efficiency (in terms of utilization of fixed assets), expense and liquidity ratios show that there is an improvement in performance of the acquiring firms in the post-M&A period. The analysis in terms of Du Pont shows improvement in the long-term operating profit margin of the acquiring firms. This means higher profit is generated per unit net sales by the acquiring firms after the M&A. The higher profits (profit before interest and taxes and non-operating income) are generated primarily due to the better operating margins. The improved operating cash flows are on account of the improvement in the post-M&A operating margins of the acquirers, not due to the efficient utilization of the assets turnover to generate higher sales. Originality/value - The paper contributes to the existing literature by comparing operating performance and profitability of acquirers before and after M&A using a comprehensive set of 14 ratios for a substantially large sample.