TABLEOFCONTENTS

1.

INTRODUCTION
...7 1.1
INTRODUCTION7
1.2 LARGE MERGERS AND ACQUISITIONS IN THE WORLD
.............9
1.2.1 LARGE MERGERS AND ACQUISITIONS OF INDIAN
COMPANIES......9
1.3 MERGER AND ACQUISITION
STRATEGY.
.10
1.3.1 FIRM DIVERSIFICATION..........10
1.3.2 CROSSBORDER MERGER ANDACQUISITIONS.........10
1.4 AIMS AND OBJECTIVES OF THE RESEARCH....11
1.4.1
AIM
OF
THE
RESEARCH...........11
1.4.2
OBJECTIVES OF THE RESEARCH...11
1.5
HYPOTHESISOFTHERESEARCH...........11
1.6 MOTIVATIONOFTHERESEARCH..11
1.7 STRUCTUREOFTHEDISSERTATION............12
1.8 FURTHERRESEARCH............14

2.

LITERATUREREVIEW.........
.....15 2.1
DEFINITION..15
2.2
TYPESOFMERGERS&ACQUISITIONS.............16
2.2.1 HORIZONTALMERGERS.16
2.2.2 VERTICALMERGERS...16
2.2.3 CONGLOMERATEMERGERS..........17
2.2.4 FINANCIALACQUISITIONS18 2.3
MOTIVESFORMERGERS.18
2.3.1 SYNERGY18
2.3.1.1 OPERATIONALSYNERGY.19
2.3.1.2 FINANCIALSYNERGY...20
2.3.1.3 MANAGERIALSYNERGY..........21
2.3.2
GROWTH..21
2.3.3 DIVERSIFICATIONANDRISKMANAGEMENT...22
2.3.4 TAXADVANTAGES...........22
2.3.5 MANAGERIALHUBRIS.23
2.3.6 INCREASEDMANAGERIALCOMPANSATIONAND
REWARDS24
2.3.7
IMPROVEDMARKETSTANDING...........25
2.3.8
EMPIREBUILDING25
2.3.9 FREECASHFLOW....26 2.4
PREVIOUSEPIRICALSTUDIESREGARDINGPOSTMERGER
PERFORMANCES26
2.4.1
EVENTSTUDIES27
2.4.2 ACCOUNTINGSTUDIES...28

2.4.3 EXECUTIVESURVEYS..28
2.4.4 CLINICALSTUDIES....29

2.5
CAUSESOFFAILURES...............30
2.5.1 OVERPAYMENT.30
2.5.2 INTEGRATIONISSUES..30
2.5.3 PERSONALMOTIVESOFEXECUTIVES31
2.5.4 SELECTINGTHETARGET31
2.5.5 STRATEGICISSUES...........31

3.

RESEARCHMETHODOLOGY..32
3.1 RESEARCH....32
3.2 RESEARCHPROBLEM............33
3.3 RESEARCHDESIGN............33
3.3.1 JUSTIFICATIONFORUSINGRESEARCHDESIGN..........34
3.4 DATACOLLECTION...35
3.4.1 PRIMARYDATACOLLECTION...........35
3.4.2 JUSTIFICATIONPRIMARYDATA36
3.4.3
SECONDARYDATACOLLECTION.............36
3.4.4 JUSTIFICATIONSECONDARYDATA..37
3.5 SAMPLING............38
3.6 STEPSINSAMPLINGPROCESS............38
3.6.1 DEFININGTHETARGETPOLPULATION...............38
3.6.2 DEFININGTHESAMPLINGFRAME............38
3.6.3
TECHNIQUESOFSAMPLING...........39
3.6.3.1 PROBABILITYSAMPLINGTECHNIQUE.39
3.6.3.2 NONPROBABILITYSAMPLINGTECHNIQUEJUSTIFICATION39 3.6.4
SAMPLESIZE..39
3.7 DATAANALYSIS............40

4.

DATAFINDINGSANDANALYSIS..41
4.1 AVIATIONINDUSTRY
OVERVIEW...............41 4.1.1
KINGFISHERAIRLINESANDAIRDECCAN
MERGER...43 4.1.2
JETAIRWAYSANDAIRSAHARAMERGER.46 4.2
BANKINGINDUSTRYOVERVIEW...48
4.2.1 HDFCBANKANDCENTURIONBANKOFPUNJAB
MERGER...49 4.2.2
ORIENTALBANKOFCOMMERCEANDGLOBALTRUST BANK
MERGER...53
4.3
OILANDGASSECTOROVERVIEW.............55
4.3.1 RELIANCEINDUSTRIESLIMITEDANDIPCLMERGER.56 4.3.2
INDIANOILCORPORATIONLIMITEDANDIBP
MERGER..........................................................................................
.59 4.4
STEELINDUSTRYOVERVIEW.63
4.4.1 STEELAUTHORITYOFINDIALIMITED(SAIL)ANDIISCO
MERGER...63 4.4.2
JSWANDSISCOLMERGER..66

5.

CONCLUSION.69
4

REFERENCELIST.............73
APPENDIX.............
84
LIMITATION.89

ChapterOne

Introduction
This is the first section of the dissertation which would be on Introduction
and would contain brief elements about the dissertation which is carried
out. The focus of the section would be to highlight about the focus of the
dissertation along with its aims and objectives.

1.1Introduction
In todays market the main objective of the firm is to make profits and
create shareholder wealth. Growth can be achieved by introducing new
products and services or by expanding with its present operations on its
existing products. Internal growth can be achieved by introducing new
products however external growth can be achieved by entering into
mergers and acquisitions. Mergers and acquisitions as an external growth
strategy has gained spurt because of increased deregulation, privatization,
globalization and liberalization adopted by several countries the world
over. Mergers and acquisitions have become an important medium to
expand product portfolios, enter new markets, and acquire technology,
gain access to research and development and gain access to resources
which would enable the company to compete on a global scale. However
there have been instances where mergers and acquisitions are been
entered into for non value maximizing reasons i.e. to just build the
companys profile and prestige.
Consolidation in the form of mergers and acquisitions has been witnessed
around the world in almost all the industries ranging from automobile,
banking, aviation, oil and gas to telecom. Some of the biggest mergers in
automobile like Daimler-Benz and Chrysler, airlines Air France and KLM and
telecom SBC and AT&T are the ones which the world can never forget. Lot
of research and investigation has gone both in the field of economics and
strategic management on the kind of benefits which are derived out of
mergers to both the acquiring and target company, the customers and the
society

at large. However one of the most widely used investigations has

been into the

shareholder wealth maximization out of mergers and

acquisitions. The news of mergers is so sensitive that it can immediately

impact the price of the share months before the actual merger takes place
for both the involved companies. The information and news which can flow
can bring in positive or negative sentiments which would lead to a rise or
fall in share price and ultimately shareholders wealth. The perception of
information about merger is such that it tries to project the future increase
or decrease in the cash flow derived out of the combination. The following
table would depict the change in share price of the acquiring company on
the day when the merger and acquisition announcement was made.

However it is important to note that mergers and acquisitions do not

regularly create value for shareholders. Many mergers and acquisitions fail
as well. Failure occurs and it deteriorates the wealth of the shareholders
when the integration process for mergers and acquisitions does not work in
a proper flow. Consulting firms also estimate that almost two thirds of the
firms who enter into mergers and acquisitions result into failure which
leads to divestures at a later stage.

1.2.1LargeMergers and Acquisitions of Indian Companies

The news about Indian companies acquiring foreign based companies was
new few years back but the present times have changed. The situation
about Indian companies venturing abroad and taking foreign companies
has become very frequent. Some of the well known deals which have
made India famous the world over have been the merger of Tata Steel and
Corus Group. Second biggest merger was between the metal giant
Hindalco and Novelis. Videocon and Daewoo Electronics Corporation from
Korea was the third largest overseas deal. In the pharmaceutical sector,
Doctor Reddys Laboratories acquired Betapharm from Germany. The top
mergers and acquisitions originating from India itself value to be close to
USD 21,500 million. In the year 2001 the value of mergers and acquisitions
abroad was only USD 0.7 billion which by 2005 hadrisen to USD 4.3 billion
(Prabhudesai, 2008).
8

One of the biggest mergers of all times is in talks from the

telecommunication sector. The Indian telecom giant Bharti Airtel is in talks
for a merger with South African MTN. This merger would create waves in
the global telecommunication market. So far in the first 6 months of 2009,
Indian

bound

mergers

and

acquisitions

abroad

have

onlybeenRs

20billion(LiveMint,2009).

1.3Mergerand Acquisition Strategy

1.3.1FirmDiversification
Generally firms enter into mergers and acquisition with firms which
normally are in the same connected line of business than to diversify it and
enter into businesses in which the firm lacks experience (Hitt, Ireland and
Hokisson, 2005). Companies which enter into mergers with diversified
firms can explore various advantages which are not available with
undiversified firms. Diversification is a process of operating into different
industries and to diversify in such a way which helps to influence the value
of the firm and enhance shareholders value (Jose, Nichols and Stevens,
1986). The reason for firms to opt for diversification as a strategyis so that
the risk can be spread across industries in which it operates. Secondly the
capital markets would welcome the multilevel activities which the firm
carried on through the diversification route which would result in growth
and profitability of the firm. However danger lies in mergers and
acquisitions as it has to conduct its own test on strength and weaknesses
before exploringits wings inotherindustries andmarkets.

1.3.2Cross-Border Mergerand Acquisitions

Internationalization is also one of the important strategies which firms are
adopting in todays market to spread its operations in foreign countries.
Cross border acquisitions refer to acquisitions done by parent company
with headquarters in one country and merger in different countries.
Domestic mergers are easier to execute because of the familiarization of

both the involved companies, the laws, procedures and other such factors
however in case of international mergers there are various complexities

involved (Ireland and Hokisson, 2005). The reason for firms opting for
cross border mergers and acquisitions is because it is a time consuming
option to enter and set up operations in a foreign country. A lot of time and
cost is saved in building up its own infrastructure and supply chain. Various
studies have shown that cross border acquisitions have resulted into
positive gains for the shareholders. Eun et al (1996) conducted a study in
US

which

shows

that

cross

border

acquisitions

have

created

immensewealthfor acquiringshareholders.

1.4Aims and Objectives of theResearch

1.4.1Aimof theResearch
The main aim of the research is to analyze the impact of mergers and
acquisitions on theoperatingperformanceofthefirm.
1.4.2Objectives of the Research

To critically analyze the impact of mergers and acquisitions on the

operating performanceofthefirm in India

To strategically evaluate the impact on shareholders wealth post

merger and acquisition.

1.5Hypothesis of theResearch
HI: Mergers improves the operating performance and shareholder wealth
of the acquiringfirm.

1.6Motivation of theResearch
The researcher in his entire career has focused towards learning something
about finance. In this entire journeyin studyingabout finance and the

markets, as a student I

0-

have learnt about many companies merging and get acquired in India
through the medium of news channels and newspapers. In India, the media
gives due attention to mergers and acquisitions which increases the
curiosity to know more about such happenings. Over the years I have seen
many mergers happening in India across varied industries. Because of this
reason mergers and acquisitions as a subject has been very close to my
heart. At this point in my career I am motivated to study about mergers
and an acquisition happening in India and the impact it has on the
operating performance and shareholders of the acquiring firm. I have
noticed that not all mergers have been successful and the shareholders
wealth in most of the mergers have also not been maximised. My main
motivational factor for doing this research comes here where I want to
understand

what

impact

does

post

merger

and

acquisitions

holdontheshareholders andoperatingperformanceofthefirm.

1.7Structureof theDissertation
The structure of the thesis would be spread across five chapters which
have been describedbelow.

1.Introduction

LiteratureReview

ResearchMethodology

. ResearchFindings
5. Conclusion
6. References
.

Appendix

1-

Chapter1
Chapter one would be on Introduction which would cover the brief aspects
about mergers and acquisition. The main theme of this chapter would
include the aims and objectives of the research, the hypothesis which has
been framed, purpose of the researchand future area oftheresearch.

Chapter2
Chapter Two would be on Literature Review which would draw theoretical
underpinnings on the subject area of research. This section would start
with the basic concepts on mergers and acquisitions and empirical
evidence

on

the

impact

which

mergers

and

acquisitions

haveonthewealthofthe shareholders.

Chapter3
Chapter Three would be on Research Methodology and Process which
would cover the process which is adopted bythe researcher for conducting
the research. The entire research process along with choosing of the
appropriate research design and sampling procedure would be specified in
detail. The main purpose of the section would also be to specify about the
various research tools and techniques which are used by the researcher in
completing the research. Proper justification for the use of particular
research techniques would be provided as a part of the section. Lastly
limitations facedbytheresearcher whileconductingtheresearchwould also
beincluded.

Chapter4
Chapter Four would be on Data Findings and Analysis which would cover
broadly about the sectors which are involved in the mergers and
acquisitions.

The

four

sectors

wouldbebroadlyspecifiedalongwiththe

highlights about them.Mainmergers which have happened within the

sector would also be focused upon. This section would study the financial
and operating numbers of the acquiring company so as to come to
2-

aconclusion as to whether mergers and acquisitions have an impact on

the operating performanceoftheacquiringcompany.

Chapter5
Chapter Five would be on Conclusion which would specify about the way
the entire research was conducted and the end result of the same. The
section would provide inputs with justification for reaching the aims and
objectives. The hypothesis which has been framed earlier would be tested
as positive or negative. The conclusion of this section would be as to
whether mergers and acquisitions have a positive impact on the
operatingperformanceof theacquiringfirm andshareholders wealthornot.

1.8FurtherResearch
The researcher would be focusing on the research carried out with respect
to the field of mergers and acquisitions. However since particular periods
and scenarios would prevail at different point in times, it would be
necessary for the research to be further enhanced. This research topic of
analyzing the impact of mergers and acquisitions on the operating
performance and shareholders wealth of the acquiring firm holds immense
scope for further analysis. This topic can be further studied by conducting
researchusingdifferent variables ordifferent set ofsectors or companies.

3-

Chapter

Two

Literature Review

2.1Definition:There are various strategic and financial objectives that influence mergers
and

acquisitions.

personalities,

Two

organisations

cultures

and

value

with

often

systems

are

different
bought

corporate
together

(Sudarsanam, 2003). The terms mergers and acquisitions are often used
interchangeably. In lay parlance, both are viewed as the same. However,
academics have pointed out a few differences that help determine
whetheraparticularactivityis amergeror anacquisition.

Aparticular activity is called a merger when corporations come together to

combine and share their resources to achieve common objectives. In a
merger, both firms combine to form a third entity and the owners of both
the

combining

firms

remain

as

joint

owners

ofthenew

entity(Sudarsanam,1995).
An acquisition could be explained as event where a company takes a
controlling ownership interest in another firm, a legal subsidiary of another
firm, or selected assets of another firm. This mayinvolve the purchase of
another firms assets or stock

( Donald M. DePamphilis, 2008). Acquiring all the assets of the sellingfirm

will avoid the potential problem of having minority shareholders as
opposed to acquisition of stock. However the costs involved in transferring
the assets are generally very high (Ross,Westerfield,Jaffe, 2004).
There is another term, takeover which is often used to describe different
activities. Gaughan (2007) says that this term is very vague. It is a broad
term that sometimes refers to hostile transactions and sometimes to both

friendly and unfriendly mergers (Gaughan 2007). Takeover is slightly

different than acquisition however the meaning of the later remaining the
same. When the acquisition is forced in nature and without the will of the
target companys management it is known as a takeover. Takeover
normally undergoes the process whereby the acquiring company directly
approaches
4-

the minority shareholders through an open tender offer to purchase their

shares without the consent of the target companys management. In
mergers and acquisitions scenario the terms mergers, acquisitions,
takeover,

consolidation

and

amalgamation

areused

interchangeably(Chandra,2001).

2.2Types of Mergers & Acquisitions:Mergers are generally classified as either horizontal vertical or
conglomerate mergers. These types differ in their characteristics and their
effects on the corporate performances.

2.2.1Horizontal Mergers
Mergers of corporations in similar or related product lines are termed as
horizontal mergers. These mergers lead to elimination of a competitor,
leading to an increase in the market share of the acquirer and degree of
concentration of the industry (M&A, Milford Green, 1990). However there
are strict laws and rules being enforced to ensure that there is fair
competition

in

the

market

and

to

limit

concentration

and

misuseofpowerbymonopolies andoligopolies.
In addition to increasing the market power, horizontal mergers often tend to be used
to protect the dominance of an existing firm. Horizontal mergers also improve the
efficiencyand economies ofscaleoftheacquiringfirm (Lipczynski,Wilson, 2004).
Recent examples of horizontal mergers in the international market are
those of the European airlines. The Lufthansa-Swiss International link up
and the Air FranceKLM merger are cases of horizontal mergers

(Lucey,Smart andMegginson,2008).

Horizontal mergers have been the most important and prevalent form of
merger in India. Various studies like those of Beena, 1998 and Das, 2000
have revealed that post 1991 or post liberalisation more than 60% of
mergers have been of the horizontal type as cited in Mehta, 2006. Recently

there have been many big mergers of this type in India like Birla L&T
merger in the cement sector. The aviation sector has also
5-

witnessed quite a few such mergers like the Kingfisher airline Air Deccan
merger and the Jet Airways Air Sahara merger. The Tata Cellular Birla
AT&T Communications merger was one big horizontal merger in the
telecommunication space.

2.2.2Vertical Mergers
Avertical merger is the coming together of companies at different stages or
levels of the same product or service. Generallythe main objective of such
mergers is to ensure thesources ofsupply(Babu,2005).
In vertical mergers, the manufacturer and distributor form a partnership.
This makes it difficult for competing companies to survive due to the
advantages of the merger. The distributor need not pay additional costs to
the

supplier

as

they

(learnmergers.com).

both

Such

are

now

increased

part

synergies

of

the

make

same
the

entity

business

extremelyprofitableand driveout competition.

Purchase of automobile dealers by manufacturers like Ford and Vauxhall
are examples of vertical mergers. Fords acquisition of Hertz is an example
of a vertical merger (Geddes, 2006). The acquisition of Flag Telecom by
Indian telecom company RelianceCommunications Ltdwas averysignificant
vertical merger.

2.2.3Conglomerate Mergers
Conglomerate mergers occur between firms that are unrelated by value
chain or peer competition. Conglomerates are formed with the belief that
one central office would
have the know-how or knowledge and expertise to allocate capital and run the
businesses

betterthanhowtheywouldberunindependently(Robert

Bruner,2004). The main motive behind the formation of a conglomerate is

risk diversification as the

successful performers balance the badly performing subsidiaries of the group
(Brian
Coyle,2000).

6-

Conglomerate mergers can also be explained as a merger between

companies which are not competitors and also do not have a buyer seller
relationship. The general observation has been that such conglomerate
mergers are not very successful. Where only a few conglomerates like
General

Electronics

(GE)

have

been

successful,

most

others

havefailed(Patrick Gaughan,2007).

2.2.4Financial Acquisitions
Such acquisitions are not very commonly discussed while classifying
mergers and acquisitions. Such acquisitions are driven by the financial
logic of transactions. They generally fall under either Management Buyouts
(MBOs) or Leveraged Buyouts (LBOs)(H.Ross Geddes, 2006).

2.3Motives forMergers

Factor affectingmergers changewiththe changinglegal,

political,economicand social environments (Kaushal,1995).Business
Organizationliteraturehas identified twocommonreasons
whicharederivedout ofmergers and acquisitions i.e.efficiency gain
andstrategic rationale(Neary,2004).Efficiencygainmeans themergerwould
result intobenefits intheform ofeconomies ofscaleandeconomies ofscope.
Economies ofscaleandscopeareachievedbecauseoftheintegrationofthe
volumes andefficiencies ofboththecompanies put
together.Secondlythestrategic rationaleis derivedfrom thepoint that
mergers andacquisitionactivitywouldleadtochangein
thestructureofthecombinedentitywhich wouldhaveapositiveimpact on
theprofits ofthefirm.

7-

However, we shall discuss these and various other factors that lead to
mergers and acquisitions. Thesefactors arediscussdbelow.
2.3.1 Synergy

Synergy has been described as 2+2=5 (Pearson, 1999). In other words,

the whole would be greater than the sum of its parts (Sherman, 1998). It
implies that the combined handling of different activities in a single
combined organisation is better, larger or greater than what it would be in
two distinct entities (Bakker, Helmink, 2004).
The word synergy comes from a Greek word that means to co-operate or
work together (Bruner, 2004). Mergers theoretically revolve around the
same concept where two corporations with come together and pool in their
expertise and resources to perform better. Estimating synergies and its
effect is an important decision in the merger process, primarily for four
reasons. Firstly, mergers are meant for value creation and hence assessing
the value that would be created by the synergies is important. Secondly,
assessing how investors would react to the merger deal is another
important consideration. Thirdly, managers need to disclose these
strategies and benefits of such deals to investors and hence their perfect
estimation and knowledge is important. Lastly, valuing synergies is
important for developing post merger integration strategies (Bruner,
2004). However important valuing synergies may be, practically very few
companies actually develop a transactional team, draw up a joint
statement regarding the objectives of the deal or solve the post closing
operatingandfinancial problems timely.
Synergies can be further discussed as being financial, operating or
managerial synergies.

2.3.1.1Operational Synergy

Operational synergies refer to those classes of resources that lead to

production and/or administrative efficiencies (Peck, Temple, 2002). Product

related diversification or

8-

mergers are often carried out keeping operational synergies in mind.

These synergies help firms bring down unit costs due to product
relatedness. Common technology,
marketing techniques like common brands and manufacturing facilities like common
logistics are essentiallythecomponents ofoperational synergy(Peng,2009).
Operational synergy can be explained as a combination of economies of
scale, which would reduce average costs as a result of more efficient use
of resources and economies of scope, which would help a company deliver
more from the same amount ofinputs (Bakker,Helmink,2004).

2.3.1.2Financial Synergy

Financial synergy refers to the impact of mergers and acquisitions on

lowering the cost of capital of the merged or newly formed entity
(DePamphilis, 2005). Financial synergies lead to reduced cost of capital
and / or increased borrowing power (Hankin, Seidnerand Zietlow,1998).
Conglomerate mergers generally focus on financial synergies that increase
the competitiveness for each individual unit controlled byone centralised
parent company beyond what could have been achieved by each unit
competing individually (Peng, 2009). Along with a lower cost of capital,
financial synergies also bringabout a larger capital base which helps
funding of larger investments. In case of conglomerate mergers, financial
diversification can bring about various other advantages like more stable
cash flows, lower performance variations, insurance gains and other tax
advantages (Bakker, Helmink,2004).

Financial synergies are possible between related and unrelated firms unlike
operational synergies that take place only between related firms (Peck,
Temple, 2002).

9-

(Peck,Temple,2002).

2.3.1.3Managerial Synergy

Managerial

synergyrefers

to

theincreased

efficiencyas

result

of

management teams of two firms coming together. Often management

teams have different strengths and their coming together could result in
improved managerial expertise (Ross, Westerfield,Jaffe,2004).
These synergies occur when competitively relevant skills possessed by
managers of previously independent companies can be successfully
transferred to the merged entity(Hitt,Harrison, Ireland,2001).

2.3.2 Growth

Growth is imperative for any firm to succeed. This growth can be achieved
either through organic or inorganic means. However, mergers (inorganic)
are considered a quicker and a better means of achieving growth as
compared to internal expansions (organic). Along with additional capacity,
mergers bring with them additional
consumer demand as well (Sloman, 2006). Mergers also brings with them access to
facilities, brands, trademarks, technologyand employees (Cameron, Green,2004).
Although mergers sound relatively easier and convenient compared to

internal growth, there are risks in actually realising the intended benefits.
The convenience
0-

associated with growth needs to be seen along with risks of running a

larger corporationas well (Cameron,Green,2004).

2.3.3 Diversification and Risk Management

One argument often presented in favour of mergers is that they help in

diversifying the groups lines of businesses and hence helps reduce risk.
Risk could be interpreted as risk from the point of view of shareholders,
lenders i.e. insolvency risk, business risk, etc.
(Levy and Sarnat,1970) point out that the probability of a financial failure
of two individual corporations is more than that in case of a conglomerate
merger of the two. From the point of view of a shareholder, the
combination of the financial resources of two firms reduces lenders risk as
compared to the risk from combining the shares of individual corporations
(LevyandSarnat,1970).
Diversification often leads to possession of the necessary management and
technical
andmarketingexpertise whichleads toanincreaseinmarket share(Pearson,1999).
Different types of mergers can help reduce business risk in their ways.
Vertical integration reduces risk by controlling the production process.
Horizontal mergers reduce competition and hence reduce uncertainties.
Conglomerate mergers put a corporations eggs in several baskets and
help it diversify. However it is claimed that conglomerate mergers are
often

done

in

the

interest

of

managers

since

shareholders

candiversifytheirportfolios themselves (Goldberg,1986).

2.3.4Tax Advantages
Mergers can benefit the corporations and individuals in their own way by
helping them reduce the tax bill. However, with stricter laws, undue
advantage taken by corporations of tax reduction can be managed. Often

large profitable corporations merge with certain loss making ones to help
them take advantage of reduced
1-

expenditure on taxation. However, small shareholders of acquired

companies tend to receivesubstantial tax benefits onmerger withlarge
corporations.
Loss making corporations can combine with fully taxable firms and can
increase the value of their own tax benefits. This happens because as per
law, taxable firms could offset losses and credits of an acquired firm with
its current and future incomes. However, this could not happen in a visa
versa situations. So acquiring corporations could benefit by means of a
reduced tax bill. On the other hand, shareholders of small acquired
corporations also tend to have tax benefits. However, these benefits are
restricted to situations where they receive shares as the mode of payment.
They receive shares in a more stable, large and profit making company
and also do not land up paying capital gains tax as their old share are not
sold but swapped as part of organisational restructuring(Auerbach,1988).
Various other benefits also accrue as part of the merger activity. Assets
can be transferred within the group without giving rise to stamp duty.
Capital assets can be transferredon anoprofit,noloss basis. Interest
couldbepaid withingroup companies so as to use it as a tax shield (Defriez,
2000). Some nations also give tax reliefs to corporations that acquire
sickunits (Kaushal,1995).

2.3.5 Managerial Hubris

As cited in Moeller et al, 2004, Roll (1986) in his study concluded that
managers of acquiring firms often suffer from hubris and hence tend to
overpay. This term refers to the overconfidence in managers in terms of
evaluating

potential

negligence

and

takeover targets.
overconfidence

of

Managers

often

managers

fail

due

because

whichtheyoftenmakemistakes inselectingtheright corporations.

to
of

Managerial hubris results in takeovers even in the absence of any synergy.

Although managers are equally likely to underestimate the synergies, more
often they overestimate them and are likely to overpay. While synergies
lead to a positive

2-

correlation between target and acquirer gains, hubris is likely to result in a

negative correlation(BerkovitchandNarayanan,1993).
While hubris should ideally depend on every individual, managers of larger
firms are generally more prone to suffer from it. This probably happens
because they are probably socially more important as managers or large
firms who have probably succeeded in growing the firm. This is also likely
because large firms tend to have more funds at their disposal and hence
mergers are easier for such firms (Moeller et al,2004).

2.3.6 Increased Managerial Compensation and rewards.

There is a tendency among managers, especially those of corporations

where ownership and control are distinct, to enter into mergers for the lure
of a higher pay packet and more rewards. This tends to happen in
corporations where reward is related to performances of employees. Such
motives are often destructive in nature andresult infailedmergers.
Managers often prioritise personal gains over the benefits for the
corporation. They often enter into mergers and seek growth of the
corporation only for the power and prestige that is associated with
corporate size. Leisure, staff and other forms of on- the-job are other
motives behind the growth policies of many managers (Dennis C Mueller,
2003).
It is seen that bidders and acquirers are rewarded handsomely in the form
of

high

managerial

compensation

and

management

dividends.

Shareholders of the acquiring companyoftentendtobe losers insuchcases.

Managers tend tobenefit at theexpense of shareholders. Hence only
successful mergers that create true value must be rewarded. Other issues
that need to be addressed in mergers are the differences between CEOs of
merging

companies

(Gaughan,2005).

on

issues

like

control,

authority

and

power

3-

2.3.7 Improved marketstanding

Mergers are often carried out to achieve a better standing in the market by
means of an increased market share and by becoming a leading player in
the concerned sector. Reducing competition is another keyconcern when
contemplating mergers. Often it is necessary to protect a key source of
supply

from

competitor

which

can

be

done

through

mergers

(Pearson,1999).
Market power is the ability of a corporation in a market to profitably charge
prices above the competitive level for a sustained period of time
(American Bar Association, 2005).
Mergers are regarded as being successful if they can result in an increase
in market power or can eliminate a threat of increased competition.
Mergers are also used to protect dominant positions (George, Joll, Lynk,
2005). However, it has also been seen that the actual merger does not
provide

much

evidence

that

market

control

leads

to

an

increaseinprofitability(Griffiths, Wall,2007).

2.3.8 EmpireBuilding

The term empire building could be quite closely related to the previous
points about increasing market power and diversification. An empire would
comprise of a cross section of businesses which would boost the ego and
the personal satisfaction of the managers and at the same time also
spread business risk. Controllers of large organisations carry out mergers
and acquisitions out of their personal whims and fancies ofbuildingan
empire(Kaushal,1995).
Managers are often motivated by their egotistical need to exercise power
who, like to flex their muscles by engaging in empire-building (Cartwright,
Cooper, 1992). Often managers state diversification as the motive while

fulfilling their empire building ambitions (George,Joll,Lynk, 2005).

4-

2.3.9 FreeCash Flow Theory

Cash flows available to suppliers or lenders of money after all operating

expenses and necessary investments in working capital and fixed capital
are termed as free cash flow (Stowe et al, 2007). This cash flow is free
and available for managers to either
reinvest ordistributeas dividends (DePamphilis ,

2008)

(Jensen 1986) pointed out that often when a firm has sufficient free cash
flows at its disposal, managers tend to enter into mergers and acquisitions
as a means to use these funds since other investments and buyback
options do not prove to be that lucrative. Managers tend to use this free
cash flow for acquisitions as it increases their empire and hence market
power even though such acquisitions may not create shareholder value.
On the other hand, any distribution of cash flows as dividends would lead
to reduced resources at theirdisposal andloss ofpower(Wubben,2007)

2.4 Previous Empirical Studies RegardingPostMerger Performances

Several researchers have tried to study the performances of acquiring

firms post the merger. However, there has been no concrete conclusion or
consensus regarding the same. The most popular forms of empirical
studies

are

event

studies,

accounting

studies,

clinical

studies

andexecutivesurveys.
From most of the studies conducted till date, it only appears that mergers
do not improve the financial performance of the acquirers. Event studies
and accounting studies as such point to the fact that these gains are either
small or non existent (Kumar,2009). However, it must also be noted that
there

have

been

studies conducted

that

show

that

post merger

performance also largely depends on the industry or sector andcannot be

generalised(Mantravadi &Reddy, 2008).

5-

2.4.1EventStudies
Event studies measure the abnormal returns to the shareholders during
the period surrounding the announcement of the merger. This abnormal
return is essentially the difference between the raw returns which is simply
the change in share prices and a benchmark index like the one calculated
by CAPM or S&P 500, etc. (Krishanmurti andVishwanath,2008.)
It has been seen that often the stock market performances of acquiring
firms have been below expectations or negative. These returns tend to
vary by the time horizon being studied. Studies of one year returns post
merger by Jensen & Ruback (1983) showed that returns averaged -5.5%.
Longer time frame studies by Magenheim & Mueller (1987) concluded that
3 year post merger studies showed a -16% return (Peck,Temple,2002).
The share returns of acquiring companies tend to be fairly positive prior to
the announcement of mergers. However, on the announcement the returns
are mixed. In general, it can be safelysaid that on announcement of the
merger,

the

acquiringfirms

shares

decline

and

this

process

may

sometimes continue for a few years together (Mussati,1995).

Studies on short term performance reveal that the target shareholders are
clear winners. On surveying the performance of acquiringand target
shareholders, it is seen that over a period of three days spanning from one
day prior to one day post the announcement, the share performance of the
target companies tend to show positive returns consistentlyacross decades
as comparedto theacquiringcompanies (Andrade, Mitchell,Stafford,2001).
These results may also vary by the characteristics of the acquiring
company and the mode of financing the transaction. Loughran and Vijh
(1997) show that cash financed mergers do better than stock financed
ones. Rau and Vermaelen (1998) show that valueacquirers outperform
theglamourones.

6-

2.4.2 AccountingStudies

This method involves the study of financial statements and ratios to

compare the pre merger and post merger financial performance of the
acquiring company. It is also used to studywhether the acquirers out
performed the non acquirers (Gaughan, 2007). Various ratios likereturn
onequityor assets, EPS,liquidity, etcarestudied.
Whether a merger actually improves the operating performance of the
acquiring company is uncertain, but mostly leads to a conclusion that
mergers do not really benefit in improving operating performances. Meeks
(1977) studied the impact of mergers on UK companies and concluded that
in the long run the profitabilityreduces drastically below the pre merger
levels, sometimes to the extent of 50%. Similarly, a study conducted by
Ravenscraft and Scherer (1987) on US companies also pointed at the same
result, wherein the profitability post merger declined or at best showed
marginal improvements. Dickerson et al, in their research on a cross
section of UK companies, led to a conclusion that acquisitions have a
detrimental effect on company performance and lead to additional and
permanent reduction in profitability (Dickerson, Gibson, Tsakalotos, 1997).
Similarly, a research conducted on Indian companies from 1999-2002 also
showed

no

real

signs

of

better

post

merger

operating

performanceoftheacquiringcompany.(Kumar,2009).

2.4.3 Executivesurveys

This method is primary source of information collection whereby the

managers are asked about the success or otherwise of the merger.
Standardised questionnaires are presented and managers are asked to
respond to them and views are generalised from these interviews (Bruner,

2004). Often the views of the management and executives are not given
the due importance. However, it must be noted that views of

7-

practitioners are equally important to supplement the large sample

scientific studies (Bruner, 2001).
In a survey of 50 executives regarding the success of mergers, on an
average respondents said that only 37% of deals created value for the
buyers and only 21% achievedthebuyers strategic goals (Bruner,2001).
On the other hand, a study conducted by Ingham, Kran and Lovestam (1992) said
that

77. of the 146 CEOs surveyed believed that there was increase in the short
term profitability after the merger and 68% believed that the profitability
increased in the longrun.
This shows that ones frame of reference has a major impact on the
responses. Either due to better information or just ego, executive opinions
are much more positive in caseofmergers wheretheparticularexecutiveis
involved(Bruner, 2001).

2.4.4 Clinical Studies

One case or a small sample is studied in great depth and insights are
derived

from

field

interviews

with

executives

and

knowledgeable

observers. This is an inductive form of research whereby researchers often

induce new insights (Bruner, 2004). The purpose of these clinical studies is
to

fill

in

the

gaps

left

by

the

study

of

the

stock

returns

andaccountingperformances (Jensen, 1986).

Various clinical studies conducted over the years have led to uncovering of
the truths behind the success or failures of mergers. A study of ATT/NCR
merger revealed that the failure was a result of 3 factors. One that
management objectives were not consistent with maximising shareholders
wealth, second was managerial overconfidence or hubris and thirdly,
ignorance of available information. The attempted merger of Renault with
Volvo failed because of disbelief in merger synergies and transfer of

control to Renault (Bruner, 2001). These were only a few examples of how
clinical studies often help in unmasking the truths behind the failure
ofmergers.

8-

2.5 Causes of Failures

There could be many causes of failed mergers and acquisitions. It is most

likelythat a failed merger would be a result of poor management decisions
and overconfidence. There could be personal reasons considering which
managers tend to enter into such activities and hence tend to ignore the
primary motive of mergers, creating shareholder value. Sometimes
however, good decisions may also backfire due to pure business
reasons.Thesefactors canbesummarisedbythefollowingpoints.

2.5.1 Overpayment

Avery common cause of failed mergers is overpayment. This situation

arises essentially due to overconfidence or the urge for expansion.
Overpayment often has disastrous consequences. Overpayment leads to
expectations of higher profitability which is often not possible. Excessive
goodwill as a result of overpaying needs to be writtenoffwhich reduces
theprofitabilityofthe firm (DePamphilis, 2005).

2.5.2 Integration issues

It is rightly said that Few business marriages are made in heaven (Sadler,
2003). Both merging companies need to be compatible with each other.
Business cultures, traditions, work ethics, etc. need to be flexible and
adaptable. Inefficiencies or administrative problems are a very common
occurrence in a merger which often nullifies the advantages of the merger
(Straub, 2007). Often it is necessary to identify the people needed in the
future to see the merger through. There must be some urgency between
the parties and good communication between them. Due to lack of
thesequalities,
2003).

mergers

oftendonot

producethedesiredresults

(Sadler,

9-

2.5.3 Personal Motives of Executives

Managers often enter into mergers to satisfy their own personal motives
like empire building, fame, higher managerial compensation, etc. As a
result, they often lose focus on the fact that they need to look at the
strategic benefits of the merger. As a result, mergers that do not
necessarily benefit the organisation are entered into. These executives
enter into these mergers for the purpose of seeking glory and satisfying
their executive ego, leading to failure of mergers

( http://finance.mapsofworld.com/merger-acquisition/failure.html)

2.5.4 Selectingthetarget

Selecting the appropriate target firm is an extremely important stage in

the merger process. Executives must be able to select the target that suits
the organisations strategic and financial motives and needs. Often the
incapabilityor lack of motivation and interest on the part of executives
leads

to

incorrect

target

selection.

Lubatkin

(1983)veryappropriatelysaidthat selectingamergercandidatemaybemoreof
anart thanascience(Straub,2007).

2.5.5 StrategicIssues

Strategic benefits should ideally be the primary motive of any merger

activity. However, managers sometimes tend to overlook this aspect.
Faulty strategic planning andunskilledexecutionoftenleads toproblems.
Overexpectationofstrategicbenefits is another area of concern surrounding
mergers. (Schuler, Jackson, Luo, 2004). These issues which form the core
of all merger activities are not addressed adequately leadingtofailures
ofmergers.

0-

Chapter

Research

Methodology
This section would display the entire research process adopted by the
research in approaching towards the aims and objectives. Use of specific
tools put to use has been justified in the section step by step. The chapter
would clearlyshowcase the approach used incompletingthe research
activity.

3.1Research
Before discussing the research structure it is important to know what
research is. Research is derived from a Latin word which means to know.
In other words research means to re-search (Sekaran, 2006). Searching for
information and presenting it is the job of a researcher. Iwill conduct this
entire research in the area of mergers and acquisitions. This work will be
guided by the five basic attributes of any research.

Firstlymyresearchwill beproblem solvingandsystematic.

Secondly it will have a logic and flow so that others can easily
understand the mainthemeoftheresearch.

It will be based on facts, so that decision making and conclusions

can be derivedfrom theinformationcollected.

It will be reductive so that the smaller sample area can be

investigated and can begeneralizedtoalarger set ofpopulation.

Lastlyit will bereplicableso that others test it orcarryout further analysis.

To summarize research is the organized and systematic procedure of
finding solution(s)toproblem(s)(Sekaran,2006).

1-

3.2Research Problem
In any research it becomes very important to know the problem area.
Determining problem area helps in chalking out plans to conduct the
research in the appropriate manner. It is said that a problem which is well
defined is half solved. The main problem area which the research is testing
related to the subject of mergers and acquisitions. In this the researcher
wants to investigate whether mergers and acquisitions have an impact on
the operating performance of the acquiring firm and does it create wealth
for the shareholders. This problem stems from the fact that there have
been mergers and acquisitions which have created wealth only for the
acquiring firms and few have created wealth for only the target firms.
Likewise mergers and acquisitions have sometimes benefitted the
shareholders of only the target company and vice versa. The researcher by
way of this thesis is trying to find out whether mergers and acquisitions
impacts the operating performance of the acquiring firm and enhances
shareholderwealth.

3.3Research Design
Personally for the researcher, research design is a very useful step in the
entire research process. I would be choosing the research design as an
entire framework by which Iwould decide the wayin which the research
would be conducted and the tools and techniques which would be
employed.

There

are

three

whichhavebeenlistedbelow:

1.

ExploratoryResearchDesign

2.

DescriptiveResearch Design

3.

Causal ResearchDesign

types

of

research

design

2Research Objective

AppropriateDesign

Theobjective is toextract thebackground ExploratoryResearchDesi

information and story behind it, to have gn
clarification on the problem area
and to establish detailedanalysis
To investigate and describe and measure DescriptiveResearch
phenomenaat aparticularpoint intime
Design
Causal ResearchDesign

To determine causality, to make if-then

decisions and define experimental
relationships

Table1:TheBasicResearch Objectiveand Research Design

3.3.1JustificationforUsingResearch Design
The researcher would be conducting two research designs for carrying out
this research. Firstly the researcher would be using Descriptive style of
research design. The main purpose of choosing descriptive style of
research design is so that the data collected is veryconcise and structured
which makes analysis factual and simple. The researcher would be
collecting data pertaining to mergers and acquisitions in the Indian
scenario. Four sectors will be covered with 2 companies per sector which
sums to 8 companies. This means that 8 mergers will be studied involving
8 acquiring companies and 8 target companies thus making a total sample
set of 16 companies. Since 16 companies would form a part of the
investigation, analyzing the same with exploratory research is difficult and
hence descriptive research design will be used. The research will examine
the

impact

that

these

mergers

in

four

sectors

have

had

on

theoperatingperformanceandshareholder wealth oftheacquiringfirm.

Secondly the researcher would be using exploratory research design in a
limited format. The researcher would try and conduct an in-depth interview

with some of the top executives in the sample companies involved. The
main context of covering in- depth interview is so that the researcher can
understand the waythe entire merger and
3-

acquisition process was conducted, the synergies which were involved in it

and the strategy in mind by the acquiring firm. However the main
limitation is only as to in- depth interviews would not be conducted for all
the sample companies involved. Secondly companies where top executive
appointment can be sought would be consideredfortheanalysis.

3.4Data Collection
Two form of data collection and information gathering techniques prevail in
the researchenvironment.Boththecollectiontechniques arelistedbelow:

1.

PrimaryDataCollection

2.

SecondaryDataCollection

3.4.1PrimaryData Collection
Primary data is that type of data which is collected for the first time and for
the specific purpose of the research. In simple words this data does not
prevail to be

4-

collected unless the need is desired for it. This type of information is the
first

hand

informationcollectedexclusivelyforthepurposeoftheresearch(Kumar,2005).
The main advantage of using primary data is because it can be easily
relied upon as the data is fresh and without any contamination and
adulteration. Secondly primary data is collected as this data is not
available anywhere. However the main disadvantage of collecting primary
data is that it takes lot of time to conduct the data. Secondly it requires lot
of effort and cost in conducting the research. Some of the common tools of
conducting primary data are by way of surveys, interview, focus group
discussion, in-depth interview, observation techniques and other form of
discussionforums andpanels (Kumar,2005).

3.4.2Justification PrimaryData
The researcher would be usingprimaryform of data collection to collect
data required for the research. To collect the required data the researcher
would be conducting an in-depth interview from a top executive from an
acquiring company. The main aim of the researcher here is to collect first
hand information as to why the acquiring company entered into the
merger, what are the synergies which are derived from the merger, the
way in which the entire merger was conducted and the waystock markets
reacted to this merger. The researcher would be preparing a list of basic
guideline questions which would drive the wayfor conductingthe in-depth
interview. The basic questions would help the researcher to collect the
primary data in a desired manner whichwouldnot leadthe interviewtogoin
adifferent direction.

3.4.3SecondaryData Collection
Secondary data is the form of data which is already present in the market
and was collected by some other person for some different purpose.

Anyform of data which is collected and used immediately becomes

secondary data for others. For example many researchers carry out
research which is primary but for students and academicians this later
becomes secondary which we then refer in journals and

5-

magazines. This type of data has more to do with past rather than the
present since it is historical in nature. In simple words secondary form of
data

is

any

form

of

data

whichis

present

intheuniverse

andcollectedbysomeoneelse for someotherpurpose (Kumar, 2005).

The main advantage of using secondary form of data is that it is easy to
collect. Secondly the time involved is relatively less than the primary data.
Similarly the efforts in collecting the secondary data are less than primary
data collection. Secondary data can be available to the researcher from
multiple modes and source vis-a-vis primary data collection. However
there are a few disadvantages which secondary data has. Firstly the data
which is available might not purely satisfy the needs of the researcher
since this data was collected by someone else for some other purpose.
Secondly if there is any error in that secondarydata it would carry the
same for the researcher as well. Thus trusting the authenticity of the data
is very important beforeusingit (Kumar,2005).
Some of the common sources of collecting secondary data are with the
help of journals, magazines, newspaper articles, books, periodicals, annual
reports,

company

circulars,

government

publications,

government

websites, industry association, libraries, e-libraries, universitydatabase

andsearchengines.

3.4.4Justification SecondaryData
The researcher would be purely using secondary form of data for this
research. The researcher would be collecting financial information from the
respective acquiring companies. Financial information over a period of time
would be studied which would involve collection of financials for certain
years before the merger and after the merger. Financials would be
collected through secondarymedium like annual reports, press releases,
Securities and Exchange Board of India (SEBI), Analyst reports from
research

companies,

search

engines

www.moneycontrol.com, ICICI Securities andso on.

and

websites

like

6-

3.5Sampling
The main decision which the researcher has to decide is to whether go for
census or sample research. Census means each and every element which
forms the part of the research will be investigated and sample means few
elements which represent the entire research area would be investigated.
Practically it is not possible to conduct a census since it is time consuming
and by the time each and every element is investigated the time might be
lost which helps to reach to the conclusion. Sample is where certain
elements are studied which form a representative of all the other elements
(Kothari,2007).
The process of sampling means to identify and select certain elements
which would represent the entire population under study. The main
rationale behind choosing samples is so that they would represent the
similar characteristics of the entire population set. The main advantage of
using sampling is so that it can save lot of time and efforts on the part of
the research and yet help to generalize the findings for the entireset
(Kothari,2007).

3.6Steps in SamplingProcess
3.6.1DefiningtheTarget Population
Target Population: For this research on mergers and acquisitions, the
target population is all those public limited listed Indian companies which
have entered into mergers and acquisitions after liberalizationinIndia i.e.
1991.

3.6.2DefiningtheSamplingFrame
Sampling Frame: For this research the sampling frame would be Securities
and Exchange Board of India where details about all the mergers and
acquisitions in Indiawouldbecapturedacross industries.

7-

3.6.3Techniques of Sampling
There are two important techniques of Sampling i.e. Probability sampling
technique andNonProbabilitysamplingtechnique.
3.6.3.1ProbabilitySamplingTechnique
The researcher would not be using probability sampling technique since
the number of mergers happened in the Indian context over the years is
very high. Secondly it would be very time consuming to list down each and
every merger which has taken placein India.
3.6.3.2Non Probability SamplingTechnique-Justification
The researcher would be using non probability sampling technique for this
research wherein the sample would be chosen purely on the basis of
convenience rather than any form of statistical tool involved in it.
Convenience sampling would be used by choosing the mergers and
acquisitions from four different sectors based on ease of availability. The
main advantage of convenience sampling is that the researcher can use
different mergers and acquisitions basis his requirement which can
represent the entirepopulation.

3.6.4SampleSize
The researcher would be drawing out sample size from 4 sectors in India.
The four sectors which would be involved in this research would be
Aviation, Banking, Steel and Oil and Gas. Two mergers per sector would be
studied for ascertaining the impact on the operating performance of the
acquiring firm. The total sample companies which would be involved for
this research would be 16 i.e. 8 companies which would be acquiring
companies and another 8 companies which would be target companies.
The sample size is chosen simple based on the convenience and not my
any means of statistical analysis.
Within Aviation industry the researcher would be studying two known

mergers in the aviation industry in India i.e. the merger between Kingfisher
Airlines and Air Deccan
8-

and secondlythe merger between Jet Airways and Air Sahara. In the
bankingindustry the researcher would study the merger between HDFC
Bank

(Housing

Development

and

Finance

Corporation)

and

CBOP

(Centurion Bank of Punjab) and the second merger would be that of OBC
(Oriental Bank of Commerce) and Global Trust Bank (GTB). Within Steel
industry, the researcher would study the merger between JSW Steel and
SISCOL and second merger would be between SAIL and IISCO. The
researcher lastly would be studying two mergers in the oil and gas industry
and the merger under study would be Bharat Petroleum Corporation
Limited (BPCL) and Kochi Refineries and secondly Reliance Industries
Limited (RIL) and Indian Petroleum Corporation Limited(IPCL).

3.7Data Analysis
Once the data is collected it needs to be analyzed. Data Analysis is a very
important step in the entire research process. The entire research activity
can be a failure if the data analysis is not done properly so as to reach the
objectives framed for the research. The process for analyzing the data
starts with data editing, coding and data entryandlastlydata analysis
(Cooper andSchindler, 2006).
The researcher would collect all secondary information regarding mergers
of the companies involved in the research and edit the data. Onlythose
financial information and details which are important to lead the objectives
would be picked up. Secondly the researcher would input all the relevant
data in the Excel sheet. Data entry would be done on all the parameters
which are chosen to be analyzed for the acquiring firm. The main place of
data entry would be an Excel Spreadsheet where the data would be
entered, stored and analyzed for further use. This data can be analyzed at
the users conveniencebyvarious forms likecharts, bars and diagrams.

9-

Chapter4 DataFindingsandAnalysis

This section would cover the analysis for the sample companies under the
research. Each and every sector would be analyzed with its synergy and
financial operations post merger and pre merger. The section would be
able to generate the analysis and impact ofmergers andacquisitions
ontheshareholders wealth.

4.1Aviation IndustryOverview
The Indian airline industry underwent liberalization in the year 1990 when
private sector companies were allowed to start its business. Many
companies like Damania, East-West, Air Sahara and NEPC entered the
market but after nearly a decade none of them survived. However in
todays scenario there have been number of private airline companies
operating in this sector with players like Air Deccan, Kingfisher, Jet Air, Go
Air, Spice Jet and many other players. The Indian aviation has only 2 state
controlled airline companies i.e. Air India and Indian Airlines. Sahara
Airlines is one of the oldest private sector airline companies in India which
commenced business in 1991 and then was rebranded as Air Sahara in
2000. Similarly the state owned domestic airline company Indian Airlines
was rebranded as Indian under its plan to revamp the position in the
airline industry. Later the government announced the merger of Air India
and Indian which would build an airline giant in India. Jet Airways is one
private player which operated both on domestic and international routes in
India and holds a major share in the aviation industryin India. Spice Jet, Go
Air and Air Deccan are the low cost no frill airline companies in India.
Kingfisher Airlines is the closes competitor to private players and it
operates in both domestic andinternational routes (CFA,2005).
Strategic alliance and mergers have been one of the buzz words in the airline
industry.
According to Oum, Park and Zhang (2000) for the airline industry strategic
alliances refer to a long term commitment and partnership with two or more

0-

companies who attempt to gain competitive advantage collectively by

fighting

their

competitors

bysharingresources,

cuttingcosts

andimprovingprofitability
The following is the market share of different airline companies in India in
the

year

2008.

Figure: Market Share % ofAirlinecompanies inJuly(2008)

During the year 2006-07 overall the passenger traffic grew by more than
27% cargo traffic grew by a modest 11%. However the growth in the last
four years has been on an average of 30%. Similarly aircraft movement
has also grown by almost 27% in 2006-07. The passenger growth in the
domestic
airline
industry
been

has
very

strong in India
with over 19
million
passengers
flying

in

2008

17million(IBEF,2009).

itself

when

compared

to

2007

whichwas

Figure: IndustryGrowth (July2008)

1-

Figure: PassengerGrowth
4.1.1KingfisherAirlines and AirDeccan Merger
One of the significant moves in the airline industry was the merger
between Air Deccan the first low cost carrier in India and Kingfisher Airline.
Air Deccan has created waves in the airline industry by offering people the
lowest cost flying experienceandshiftedrail travellers toairlinetravellers.
However Air Deccan and Kingfisher Airlines have now merged and known
as Kingfisher Aviation. The merger started when Kingfisher Airlines owner
Dr.

Vijay

Mallyabought

26%

controllingstakeinAirDeccan(IndianExpress,2007).
Synergy
The combined entity now has a fleet size of 71 aircrafts covering 70
destinations and more than 550 flights in a single day. The merger would
benefit

the

entity

byoffering

operational

synergies

like

inventory

management, maintenance, engineering and overhaul which would reduce

the overall cost by4% to 5% i.e. around Rs 300 million (Financial Express,
2007a). Further the company would be able to rationalize its routes in a
better wayby changing its fair structure which will attract more passengers
(Business Standard, 2007). The merged entity would also have clear
business model with reaching wider domestic base with Air Deccan
capabilities and Kingfisher Airlines wouldreachinternational destinations.
Interview was conducted with Mr. Anish Naik of Kingfisher Airlines who is

with the planningand advisoryboard.His views onsynergies wereas below:

2-

Synergies can be seen in two directions financial and operational. On

operational grounds this merger would help Kingfisher expand its
international base as it finishes 5year mandatory period to fly domestic
before getting an international license. Secondly on financial grounds it
would mean a lot to Kingfisher because of savings on operating cost. Mr
Naik also pointed out that with the growth expected in the industry the
combined entity would make better profits in the coming years. Other
reasons for merger with Air Deccan was totally logistical like both the
companies ahre the same maintenance contract with Lufthansa Tecknik,
both the companies have Airbus fleet andsametypes ofengines andbrakes.
Financial Analysis
The merger between Kingfisher Airlines and Air Deccan took place in the
year 2006. Hence below analysis has been done two years prior to the
merger

i.e.

during2004-05

and2005-06

andtwo

years

afterthemergeri.e.2007-08and 2008-09respectively.
KINGFISHERAIRLINES 2004-05 2005-06 2006-07 2007-08 2008-09
OperatingProfitMargin
10.2% -1.3% -21.9% -51.5% -26.5%

Gross OperatingMargin
Net ProfitMargin
Return on Capital Employed
Return on NetWorth

Debt-Equity Ratio
EPS

PE

-4.0% -24.6% -21.0% -47.8% -33.9%

-6.4% -27.5% -23.6% -13.1% -30.5%
15.4% -9.8% 7.5% -19.6% -24.4%
-143.0% -347.5% -287.4% -129.8% -809.0%

20.8 4.6 6.3 6.4 4.7

-63.0 -347.5 -31.0 -13.9 -118.5

-1.9 -0.3 -4.6 -9.6 -0.4

(Appendix 1)
3-

The results for Kingfisher Airlines shareholders have been very similar to
the results of Jet Airways. Kingfisher airlines has seen operating margins
fall to a negative 26.5% and gross operating margin fall to a negative 33.9.
Similarly the net profit margin and return on capital employed has also bee
negative for the firm post merger basis. The EPS for Kingfisher Airlines has
fallen quite sharply since the number of shareholders has increased but
with that the profit after tax has not increased an instead has fallen.
Shareholders wealth of Kingfisher airlines has deteriorated significantly
post merger with Air Deccan. The P/E ratio of the firm also states that the
stock has been undervalued over the years and does not look that an
immediate upward movement insharepriceorEPS basis whichtheP/Ewill
goup.

4-

4.1.2JetAirways and AirSaharamerger

Jet Airways started its business operations in 1993 and is now the largest
company in the airline industry in terms of market share. The company has
a fleet size of 88 aircraft and flies to over 60 destinations worldwide with
over 360 flights scheduled forasingleday.
Synergy
Fleet Jet
Airways

Air
Sahara

Merge
d
Entity

B737-300 - 2 2 B737-400 6 3 9

B737-700 13 7 20 B737-800 28 7
35

B737-900 2 2 CRJ-200 7 7 ATR-72 8

- 8 A330-200 2 - 2 A340-300 3 - 3
Total 62 26 88

Table:

Fleet

andAirSahara

SizeofJet
Source:

Airways

CentreforAsia

PacificAviation,2007
The major efficiency and synergy comes because both the companies use
B737 as their domestic fleet efficiencies. Air Sahara has B737s which are
more than 10 years old and CRJ-200 which were taken on lease for higher
rentals. Jet Airways will have to rationalize the cost aspect of operating and
maintaining the fleet size. Since Jet

5-

Airways does not havea propermix ofaircrafts this would leadto

highermaintenance

cost

forthemergedentity(Centrefor

AsiaPacificAviation,2007).

Financial Analysis
The acquisition between Jet Airways and Air Sahara took place in the year
2006. Hence below analysis has been done two years prior to the merger
i.e. during2004-05 and2005-06 andtwo years afterthemergeri.e.200708and 2008-09respectively.
JET AIRWAYS 2004-05 2005-06 2006-07 2007-08 2008-09
OperatingProfitMargin

33.2% 24.8% 14.7% 8.6% 5.2%

Gross OperatingMargin 24.0% 19.8% 6.6% 4.1% -6.4%

Net ProfitMargin
9.0% 7.9% 0.4% -2.9% -3.5%

Return on Capital
Employed

31.6% 21.2% 13.8% 6.3% 4.0%

Return on NetWorth

22.4% 21.1% 1.3% -13.7% -31.1%

Debt-Equity Ratio
EPS

1.7 2.3 2.9 6.5 12.6

45.4 52.4 3.2 -29.3 -46.6

PE

27.6 18.5 195.8 -17.7 -3.3

(Appendix 2)
On carefully looking at the above figures it can be seen that the operating
margins of Jet Airways were verystrong in the year 2004-05. Later the
operating margins started slowing down in the coming years. Post merger
the operating margins of Jet Airways had gone down to 5.2% from an
earlier five year high of 33.2%. Gross Profit margin
6-

was at a very strong 24% in 2004-05 however post merger it has moved
into a negative territory of (6.4%). Return on capital employed proves the
efficiency with which the business is maintained. Looking at the post
merger results the shareholders who act as owners would surely be
disappointed with only 4% return compared to 31.6% in 2004-05. Similarly
the Return on Net worth for the company has also gone negative and post
merger it has not added any significant value for the shareholders. The
debt equity ratio of the firm at current level is around 10 times higher than
in the year 2004-05 which shows the level of leverage which the company
wants to drive on. The EPS which is the crude factor for any shareholder
has seen a dip of -46.6%. Looking at the P/E ratio clearlyshows that the
stock

has

been

highly

undervalued

and

shareholders

wealthhas

beendeteriorated.
Overall it can be seen that Jet Airways has been able to post positive
operating margins post merger however Kingfisher Airlines have failed to
do that. Kingfisher Airlines also has a negative return on capital employed
compared to Jet Airways. But on the other parameters like Earnings per
share, Return on Net Worth and Net Profit Margin have been negative for
both the companies. It can thus be inferred that mergers and acquisitions
havenot created enough shareholder wealthpost merger.

4.2BankingIndustry-Overview
Since 1991 when Indian banking sector went under liberalization the
industry has been sound, strong and well regulated. On comparison with
any other banking sector in the world the current position of Indian
banking sector is robust. As of 2009, there were total 171 Scheduled Banks
in the country out of which 86 were regional rural banks. Collectively till
March, 2009 there were 56,640 branches of all the scheduled commercial
banks put together and more than 27,000 ATMs. Indian banks have
continued to make their presence felt in international markets. During
2008 and 2009, Indian banks started with 20 representative offices and
subsidiaries in overseas markets. Till 2009, there were 32 foreign banks

which were operating in India with over 290 branches. The largest bank in
India is State Bank of India (SBI) (RBI Annual Report,2009).

7-

4.2.1HDFCBank and Centurion Bank of Punjab Merger

HDFC Bank (Housing Development Finance Corporation) was established in
the year 1994 immediately when the government of Indian liberalized the
sector. At present the bank has a network of 1412 branches across India
and over 3,295 ATMs in more than528cities in India(www.hdfcbank.com)
HDFC Bank and Centurion Bank of Punjab underwent a merger in early
2008. The share swap ratio of the merger was 1:29 i.e. for every 29 share
of Centurion Bank of Punjabshareholders wouldget 1shareof HDFC
Bank(Business Standard,2008).
According to Deepak Parekh (Chairman of HDFC),

It is a win-win situation for all

the stakeholders, shareholders, employees and customers of the bank

(Financial

Express,2008).

Synergy
The combined bank would have a branch network of 1,148 branches since
HDFC Bank while entering in the merger has 754 branches and Centurion
Bank of Punjab had 394 branches. ICICI Bank which is the closes
competitor to HDFC Bank had a branch network of 955 branches. This

makes HDFC Bank the largest private sector bankinthecountryinterms

ofnumberofbranches.

8-

Secondly the merger would give HDFC Bank have a combined asset size
of over Rs 1,10,000 crores. Similarly the deposits of HDFC Bank would go
up to Rs.1,20,000 crores and advance would be up to Rs.85,000 crores.
This would collectively make the balance sheet size of HDFC Bank grow to
Rs.1,50,000 crores (Value Notes, 2008).
Interview was conducted with Mr Vishal Salecha (Head, Corporate
Planning). Mr Salecha indicated that the merger will create history in the
Indian banking industry and will induce other banks to look for
consolidation and grow by size. According to him, both banks complement
each other in the best way since both the banks have tremendous
experience in both operating and in merger delivery. HDFC Bank has
previous experience of acquiring Times Bank whereas Centurion Bank of
Punjab had earlier experience of acquiring Lord Krishna Bank and merger
of Centurion Bank with Bank of Punjab. The only challenge what Mr
Salecha saw in the merger was handling of stress accounts and non
performing assets in Centurion Bank of Punjabs portfolio. This would add
pressure on HDFC Bank to do excess provisioning for NPAs which can hit
the margins to a certain extent. However the effect would be mitigated
since the merger brings branch network, asset size and cost savings for
HDFC Bank. Overall there is geographical synergy which adds significant
branch network to the bank ad every branch added adds lot of CASA
growth for the bank. (CASA means Current Account and Savings Account
which is a low cost deposit for thebank).
Positives from the merger are that HDFC Bank would have increased
footprint and high metro presence. Secondly HDFC Bank would have a
better cost to income ratio because of better cost efficiencies and cost
management and lastly both the banks have a high profile and
experienced

top

management

who

have

headed

foreign

banks

likeCitigroupbefore.
Negatives

from

the

merger

are

majorlydue

to

high

amount

of

nonperformingloans on the books of Centurion Bank of Punjab which would

not be on the books of HDFC Bank.(Appendix 9)

9Details of Branch
Network

HDFCBank Centurion Bank of

Punjab

Metro
Non Metro
Metro Proportion

287
467 267
38. 32%

127

ImprovedUtilizationofBranches
Business (In Rs
crores)

Merged
Entity

HDFCBank Centurion Bank of

Punjab

Business Per
Branch

22,8

Business Per
employee

0.8 0.6 0.7

Asset PerBranch 176

0.6 0.45 0.58
Asset Per

90

181

64

137

Employee
Profit After Tax
perBranch

0.24

Profit After Tax

perEmployee

00.8 0.03 0.07

0.5

0.1
7

0-

Financial Analysis
The merger between HDFC Bank and Centurion Bank of Punjab took place
in the year 2008. Hence below analysis has been done two years prior to
the

merger

i.e.

during2005-06

and2006-07andone

year

afterthemergeri.e.2008-09.
HDFCBank 2004-05 2005-06 2006-07 2007-08 2008-09
OperatingProfitMargin 41.7% 36.8% 40.0% 37.6% 24.1%

Gross OperatingMargin 30.8% 26.3% 30.5% 28.6% 18.0%

Net ProfitMargin
27.6% 24.9% 20.1% 15.7% 13.7%

Return on Capital
Employed

2.6% 2.3% 3.1% 2.9% 2.1%

Return on NetWorth

18.9% 21.1% 21.5% 13.8% 14.9%

Debt-Equity Ratio
EPS

9.21 11.39 11.05 9.15 9.67

27.63 35.65 43.34 44.92 52.82

PE

19.26 21.60 21.92 31.19 20.82

(Appendix 3)
HDFC Bank is one of the strongest banks in the Indian banking sector with
a high capital adequacy ratio and good year on year results. However on
testing the pre merger and post merger numbers it can be clearly seen
that compared to pre merger ratio the post merger ratios have taken a
beating on all parameters like operating margin, gross profit margin, net
profit margin, return on capital employed and return on net worth. The
only significant positive factor for the shareholders has been that the EPS
has risen sharply thanks to a robust profit made by the company and a
good integration process. The P/E ratio of the company has been at
significant levels which
1-

is very similar to the pre merger levels. Overall HDFC Bank shareholders
would not be happy on other parameters however the firm has been able
to generate god earning per share even post merger and the valuation of
the companyis also stable at 20 times its earnings.

4.2.2Oriental Bank ofCommerceand Global TrustBank Merger

Oriental Bank of Commerce is a public sector bank which was established in the year

1943.

Immediately after nationalization in 1980s the bank started

gaining momentum and it increases its branch network across India. At

present

it

has

branch

network

of

530branches

and505ATMs

(www.obcindia.co.in)
Synergy
The synergy for Oriental Bank of Commerce comes from the good network
of branches which Global Trust Bank earlier had. Secondlythe merger offers
operational convenience to Oriental Bank of Commerce since both the
banks

use

the

same

operational

software

and

technology

based

applications. Thirdly Oriental Bank of Commerce benefitted from the

savings from Corporate Tax during the year 2008 and 2009 since it had
taken over huge NPAs from the erstwhile Global Trust Bank. Oriental Bank
of Commerce also expects to recover close to 30% from the existing NPAs
which will add to its books. GTB in the year 2006 made a profit of 150
crores which was added to the books of Oriental Bank of Commerce.
However during 2007 GTB made a loss of 812 crores which got
accumulated on to the balance sheet and accountingstatements of
Oriental BankofCommerce(Domain,2004a; 2004b).
Cost synergies comes from the fact that OBC directly got access to 100
branches

and

275ATMs

ofGTB

whichwouldotherwisehave

cost

Rs

2billionforOriental Bankof Commerce to open in the near future. Oriental

Bank of Commerce would also get access to 1 million customers of Global
Trust Bank. Global Trust Bank with its necessaryinfrastructure, strong client
base and pan Indian network of branches would offer good benefits

toOriental BankofCommerce (Domain,2004a, 2004b).

2-

Financial Analysis
The merger between Oriental Bank of Commerce and Global Trust Bank
took place in the year 2005. Hence below analysis has been done two
years prior to the merger i.e. during 2002-03 and 2003-04 and two years
after the merger i.e. 2005-06 and 2006-07.
2002-

2003-

2004-

2005-

2006
-

OperatingProfitMargin

Gross OperatingMargin
Net ProfitMargin

35.2% 46.4% 66.5% 71.0% 76.0%

38.4% 50.2% 34.5% 28.9% 25.1%

13.9% 20.8% 20.3% 13.5% 11.2%

Return on Capital Employed

Return on NetWorth

3.4% 3.7% 1.9% 1.7% 1.5%

21.7% 25.6% 21.8% 10.8% 10.4%

Debt-Equity Ratio
EPS

14.50 13.59 14.60 9.88 11.54

23.74 35.64 37.72 22.24 23.19

PE

2.78 8.16 8.14 10.57 7.98

(Appendix 4)
Oriental Bank of Commerce is a public sector bank in India and is posting
favourable numbers year on year. Post merger the operating profit margins
of the company has raised sharply from 35% in 2002-03 to 76% in 200607. However the gross profit margin of the company has seen a dip since
2003-04. The return on capital employed and return on net worth for the
shareholders has also dropped sharply, however it is still in the positive
zone. The debt equity ratio of the company has been at an average of
close to 12.5% over the five year period. Similarly the EPS of the firm has
been
3-

maintained at Rs 23 pre and post merger. The valuation of the company

measured by its P/E ratio has moved to close to 8 times its earnings.
However the stock still remains undervalued compared to its other peers.
Overall the shareholders have not gained significantly out of the merger
and the pre merger and post merger performancehas beenmaintainedat
thesimilarlevel.

4.3Oil and Gas SectorOverview

Oil and gas is a industry of great importance for a developing country like
India. The industry supports many industries together like transportation,
aviation, manufacturing and other ancillary sectors which collectively
account for 15% of the GDP. Domestic crude oil production fell marginally
from 34 million tonnes in 2007- 2008 to 33.5 million tonnes in 2008-2009.
In the same time, production of natural gas went up from 32.4 billion cubic
metres in 2007-08 to 32.8 billion cubic metres in 2008-09. India is
slowlyemergingas one of the hubs for refiningoil products because of the
cost advantage compared to other Asian countries. India is the fifth largest
in the world with refining capacity and holds close to three percent of the
global oil refining capacity. The government of India has taken several
initiatives in this sector. It has allowed 100% foreign direct investment in
all the private refineries and 26% in all the government owned refineries
across the country through the automatic approval route.

4-

4.3.1RelianceIndustries Limited and IPCL Merger

Reliance Industries Limited is one of the largest private sector companies
in India and the second largest group in the world in terms of annual
turnover. This company was found by one of the legends of Indian industry
Mr Dhirubhai Ambani (www.ril.com) Reliance as a group has foray into oil
and gas, retail, power, telecommunications, logistics, infrastructure and
entertainment.

However

the

businesses

have

now

split

betweentwobrothers i.e. Mukesh Ambani andAnil Ambani.

IPCL was established in the year 1969 by government of India. IPCL was
the second largest petrochemical industry in India just next to Reliance
Industries. IPCL has a installed capacity of over 130,000 tonnes. It
produces LDPE, PVC, PP, PBR, AF, DSAF,EG, LABandbenzenebased
products (Moneycontrol,2009).
One of the biggest mergers in the Indian oil and gas sector was between
Reliance Industries Limited and Indian Petroleum Corporation Limited
(IPCL) in the year

2007.

The swap ratio of the merger was fixed at 1:5. This means that

for every five shares of IPCL the shareholders would get 1 share of RIL. This
is a horizontal acquisition which would have positive impact the valuation
and cash flows of the companypost merger (Hindu,2007).

Synergy
The merger would create synergies for both the companies shareholders.
RIL would benefit from a larger and a stronger balance sheet whereas IPCL
shareholders will benefit from the new dynamism, experience and brand of
RIL. The combined net worth of RIL will be Rs 50,000 crores and the overall
balance sheet size would increase to Rs 78,000 crores. RIL will create one
of the largest petrochemical complexes in the world because of this
merger because IPCL has three petrochemical plants which include a
naphtha based plant and gas based plant (Indian Express, 2007).
Theproduct synergyofboth IPCLandRILis givenbelow:

5Product Capacityin 000tonnes Merged

Entity

RIL

Total
Merged
Capacity in
entity %
India
of
Total
Capacity

IPCL

HDPE
400 380 780 1520 51%
LDPE
0
160
PP
1000 190 1190 11415 84%
PVC
270
205
MEG
360 170 530 580 91%
LAB
100
45
Source: Fakih,2006

160

184

87%

475

770

62%

145

320

45%

Reliance has a naphtha based cracker plant where its feedstock comes
from Oil and Natural Gas Corporation (ONGC). IPCL has naphtha based
cracker plant where feedstock comes from IOCs plant which is just next
door. RIL will be able to displace its future feedstock from ONGC and make
contracts with IOC which will help in saving lot of freight and transportation
costs. This in turn will help in gaining better sales realization and improve
margins. Also other plants would have similar operational synergies
(Fakih,2006).
RIL will also save on significant overlap of costs by IPCL and RIL. RIL
spends nearly Rs 532/tonne on external sales whereas IPCL spends around
Rs 519/tonne of product. The duplicate channel infrastructure would be
done

away

by

RIL

and

IPCL

whichwouldhelpinsavinglots

ofcosts

(Fakih,2006).

6-

Financial Analysis
The merger between Reliance Industries Limited and Indian Petroleum
Corporation Limited took place in the year 2006. Hence below analysis has
been done two years prior to the merger i.e. during 2004-05 and 2005-06
and two years after the merger i.e.2007-08 and2008-09 respectively.
RIL 2004-05 2005-06 2006-07 2007-08 2008-09
OperatingProfitMargin 19.4% 17.6% 17.3% 17.5% 16.0%

Gross OperatingMargin 21.6% 18.4% 17.5% 18.1% 17.4%

Net ProfitMargin
11.5% 11.2% 10.4% 14.6% 10.4%

Return on Capital
Employed

23.8% 21.0% 22.7% 19.7% 18.6%

Return on NetWorth

18.7% 18.2% 17.1% 23.9% 15.0%

Debt-Equity Ratio
EPS

0.46 0.44 0.44 0.45 0.47

54.5 65.2 78.5 134.2 105.4

PE

8.3 12.2 17.4 17.5 14.4

(Appendix 5)
RIL is one of the biggest companies in the oil and gas sector in India. Pre
merger the companyhas a good operating margin ratio of 19.4% which
was one of the best in the Indian oil industry however post merger the
ratio has dropped down significantly. Similar pattern was seen with respect
to gross profit margin and net profit margin. In the longer run RIL has
always pleased its shareholders, however two years post merger both the
return on net worth and return on capital employed saw a sharp drop of
over 3%. The only positive point for the company has been that its
shareholders
7-

would be pleased with the year on year growth in EPS. The company has
always taken decisions which are in favour of its shareholders which can
be seen the EPS being almost doubled in the frame of five years. The
valuation of the company has increased based on the P/E multiple which is
14 times its net earnings. On all the other financial parameters, RIL has
seen

tremendous

drop

post

merger

with

only

EPS

beingon

thepositiveside.

4.3.2IndianOil Corporation Limited and IBPMerger

IOC (Indian Oil Corporation) came into being in the year 1959. IOC
operates mainly in the downstream segment which involves refining and
marketing of oil and petrol based products. It operates into aviation turbine
fuel, petrol spirit, high speed diesel and liquefied petroleum gas. It also has
three subsidiaries CPCL, BRPL and IOBL (www.iocl.com)
IBP is one of the oldest companies in the oil and gas sector in India which
was established in the year 1909. The company is Indo-Burma Petroleum
based company operating in India. IBP is mainly engaged into the storage,
distribution and marketing of petrol based products in India. It is mainly
engaged into industrial and cryogenic containers.
Indian Oil Corporation and IBP Merger took place in 2007 with a share swap
ratio of 1.25: 1. This means that for every IOC shareholders would get 125
shares for every 100 IBP shares held(HinduBusiness Line,2007).
Synergy
IOC would get synergies in the form of tax savings to the tune of Rs 45
crores. IBP is an oil marketing company which has a very strong presence
in marketing and distribution of oil products mainlyin northern India. IBP
also has close to 1,295 retail outlets which would add to the benefits for
distribution of IOC. IBP also serves other segments like industrial
explosives and cryogenics. IOC on the other hand is the largest
downstream operator of oil and gas in India. IOC is also the largest refining

company in the country. IOC has over 22,000 retail outlets across India.
Stronger

8-

distribution would be one of the keyfor IOC from this merger. This would
give better visibilityandbrandpowerto IOC (Venkiteswaran, 2008).
Secondly IBP has engineering expertise of manufacturing cryogenic
containers and transporting gas. IOC would get the same expertise from
this merger and as a result of this the company has now launched a
branded gas in the market which has a leadership. Its gas based products
are launched under the brand name Indane (Financial Express,2004).
IOCs share in the diesel segment would grow to 50% from the present
40%. IBP also has 2500 petrol pumps across the country and IOC has 8,200
petrol pumps across the country. The integration with petrol pumps would
lead to rise in market share from petrol based products to60%from 55%.
Interview was conducted with Mr Sunil Rode of IOC who is the head of
Logistics and Transportation at IOC. According to him in a business like oil
and gas where prices are regulated by the government it becomes very
important to fight on costs and gain market share. The rationale and logic
behind the merger was that both the businesses have identical storage,
distribution and marketing infrastructure. Merger with IBP would lead to
doing away with existing IBP and IOC overlap infrastructure which would
help in saving of substantial costs. Several petrol pumps and outlets which
are closely located to each other would be dismantled for better fuel
station rationalization. However in the entire merger the main challenge
would be with respect to the employee unions and associations which IBP
has.

Managing

smooth

themainchallengeintheentireprocess.

integrationofemployees

was

9-

Belowis the Integration Model whichwas shared byMrSunil Rode

Rationale point
No IBP Value Chain
Integration
for
activities
Pattern
Merger
1

Cryogenics
Containers

MainBusiness

Benefit

for

(Access
technology
expertise
business)

IOC
to
and
in

2
3

Explosives MainBusiness Benefit for IOC

Petrol Retail
High
Integration High

Lube

level

of

possibility

sunergies for IOC

High Integration

IBP Red is a weak

brand compared to
IOCs SERVO brand.
However

with

existing
infrastructure would
help IOC buildfrom
current level
6

Finance High Integration Would add to the balance sheet and

the size of the books for
IOC

0-

Financial Analysis
The acquisition between Indian Oil Corporation and IBP took place in the
year 2006. Hence below analysis has been done two years prior to the
merger

i.e.

during2004-05

and2005-06

andtwo

years

afterthemergeri.e.2007-08and 2008-09respectively.
IOCL 2004-05 2005-06 2006-07 2007-08 2008-09 Operating Profit
Margin
5.3% 4.5% 5.0% 4.6% 4.4%

Gross Operating
Margin

5.8% 5.1% 5.2% 5.2% 2.3%

Net ProfitMargin

3.5% 2.8% 3.5% 2.8% 1.0%

Return on Capital
Employed

19.7% 16.6% 20.3% 17.9% 18.2%

Return on NetWorth

18.8% 16.8% 21.5% 16.9% 6.7%

Debt-Equity Ratio
EPS

0.67 0.90 0.78 0.86 1.02

42.17 42.37 64.65 58.51 24.79

PE

10.39 13.78 6.19 7.61 15.61

(Appendix 6)
Indian Oil Corporation with its merger with IBP has seen deterioration in
the overall shareholder wealth for the company. The operating margin pre
merger for the company was at 5.3% which dropped to 4.4% after the
merger. Similarly gross profit margins for the company went down half
from 5.8% in 2004-05 to 2.3% in 2008-09. Return on Capital employed and
Return on net worth has also dropped significantly post merger. The net
profit margin for the company has dropped from 3.5% to 1% in
1-

2008-09 (post merger). EPS which is the indicator of shareholders wealth

has also dropped from Rs 42 to Rs 24 in 2008-09. The valuations of the
companyhad reduced in the first year post merger however the valuations
started increasing on the P/E multiple and it is close to 16 times its net
earnings. Overall the merger of IOCL and IBP has not beenableto
createenoughwealthfor its shareholders.

4.4Steel IndustryOverview
Steel is one of the most widely used commodities in the world. The
consumption of steel in an economy reflects the growth pattern of related
industries like manufacturing, housing, automobile and infrastructure. The
Indian steel industry is more than 100 years old and till 1990 the industry
was operating in a regulated market. Deregulation in the industry took
place in the year 1991-92. Since then India has now become the fifth
largest producer of steel in the world. In 2009 the steel industry in India
produced close to 53 million tonnes and accounts for close to seven
percent of the total world steel production. The National Steel Policy of
India has aimed to produce up to 110 million tonnes of steel by 2020.
However the Ministry of Steel is projecting that with the current pace of
production it should touch 124 million tonnes by 2012. Along the
consumption side India accounts for close to 5% of the world steel
production which is growingstrongly at 16%. The greatest opportunityfor
India lies in the fact that the per capita consumption of steel is very less at
35

kg

comparedto250kginChinaandanaverageof150kgintheworld(IBEF,2009).

4.4.1Steel Authorityof IndiaLimited (SAIL)and IISCO Merger

Steel Authority of India Limited is one of the largest integrated iron and
steel producer in India. It is mainlyinto hot rolled and cold rolled steel
products. It has five integrated plants and three special steel plants which
are strategically located in East India close to the iron ore and coal

deposits.

The

company

is

government

owned

publicsectorundertakingwith86%share(www.sail.co.in).

2-

Steel Authority of India Limited (SAIL) and Indian Iron and Steel Company
(IISCO) underwent amergerinthe year2006 (The Hindu,2006).

Synergy
SAIL has lot of synergies out of the merger with the first being access to
iron ore mines. IISCO has iron ore mines located in Chiria, Gua and
Mandharpur which are one of the best quality iron ore grounds in India.
IISCO has collective iron ore deposits of over 800 million tonnes. With the
merger in place the iron ore deposits of SAIL has increased to over 3200
million tonnes. Other than this IISCO also has collieries in Chasnala, Jitpur
and Ramnagar which has collective coaking oil reserves of 125 million
tonnes. Overall the merger has synergies with high infrastructure facilities
of IISCO and high level of quality iron ore deposits. Secondly the synergy
would also arise from the product mix of IISCO. The company had product
portfolio
comprising of beams, channels, angels and special steel sections which are not
producedbyanyothersteel manufacturerintheworld(PR Domain,2006).
Operationally IISCOs mines are closely located to the production channels
of SAIL which would reduce the overall cost of production for the company.
With respect to
employees IISCO immediately before the merger went for employee restructuring
exercisewhereinVRS (VoluntaryRetirement Scheme)was offeredto3000 workers.
Mr Vasant Srivastava head of Production and Planning was interviewed
from SAIL. According to Mr Srivastava, the biggest rationale behind the
merger was the rich iron ore deposits which IISCO has. Secondly the
strategic locations of the mines provide SAIL with operational and cost
efficiencies. SAIL views IISCO as a very opportunistic company where IISCO
has access to raw materials and SAIL has financial and managerial
capabilities to gain more out of IISCO. Inter plant synergy and a good
complementary product mix of both the company makes it a good fit for
SAIL. With the financial strength of SAIL, the company would invest heavily
in IIS COformodernizingits plant whichwouldleadto bettercost efficiencies

infuture.

3-

Financial Analysis
The merger between Steel Authority of India Limited and IISCO took place
in the year 2006. Hence below analysis has been done two years prior to
the merger i.e. during 2003-04 and 2004-05 and two years after the
merger i.e. 2006-07 and 2007-08 respectively.
SAIL 2003-04 2004-05 2005-06 2006-07 2007-08
OperatingProfitMargin

20.7% 36.5% 23.2% 28.1% 28.2%

Gross OperatingMargin 49.3% 36.5% 24.5% 31.0% 31.0%

Net ProfitMargin
11.6% 23.7% 14.2% 18.1% 18.9%

Return on Capital
Employed

36.5% 69.4% 44.3% 51.4% 49.7%

Return on NetWorth

49.9% 66.1% 31.8% 35.8% 32.7%

Debt-Equity Ratio
EPS

1.72 0.56 0.34 0.24 0.13

6.08 16.51 9.72 15.02 18.25

PE

5.43 3.76 8.54 7.59 10.80

(Appendix 7)
Steel Authority of India has seen mixed post merger results on different
parameters. Some of the financial parameters where it has seen a drop
has been Gross Operating Margin where the margins have dropped from
49% to 31% in 2007-08 (post merger). The return on net worth for the
company has also dropped from 50% in 2003-04 to

32. in 2007-08. However the EPS for SAIL shareholders has increased
significantly from Rs 6 in 2003-04 to Rs 18 in 2007-08. The P/E multiple
has been in the range of

4-

10 times its earnings in 2007-08. Overall the merger has been positive
post

merger

on

certainfinancial

parameters

howeverit

has

taken

beatingonotherthreeindicators.

4.4.2JSWand SISCOLMerger
JSW Steel is part of the O P Jindal Group which is one of the largest steel
companies in

India

withasteel

productioncapacityof

4million

tonnes

perannum.JSW Steel has astrong presence in flat steel products and it is

one of the largest galvanized steel exporters in the country. Currently the
company is fulfilling its buying requirements from both open market and
through its own mines. However it can only fulfil 30% requirements from
its ownmines (www.jsw.in).
JSW Steel went for merger with Southern Iron and Steel Company Ltd
(SISCOL) in the year 2007. The share swap ratio of the merger was fixed at
1:22. This means that for every 22 shares held for SISCOL, shareholders
would

get

share

of

JSW.

JSW

is

the8th

lowcost

steel

producerintheworld(DNA India,2008).

Synergy
SISCOL also has a capacity to produce 0.3 million tonnes of steel and also
a captive coke facility for 0.4 million tonnes. SISCOL also has access to iron
ore deposits of 180 million tonnes. However the iron ore deposits are not
completely of high quality and would need further processing and
beneficiation. With the size and technology of SAIL, this would be easily
done and better efficiencies could be gained out of it (ICICIDirect,2008).

5-

Financial Analysis
The merger between JSW Steel and SISCOL took place in the year 2008.
Hence below analysis has been done two years prior to the merger i.e.
during 2005-06 and 2006-07 andone year afterthemergeri.e.2008-09.
JSWSteel 2005-06 2006-07
OperatingProfitMargin

Gross OperatingMargin
Net ProfitMargin

Return on Capital
Employed

2007-08 2008-09
27.8% 32.8% 29.5% 20.4%

28.0% 28.1% 27.8% 16.4%

14.2% 15.0% 15.2% 3.3%

24.3% 30.0% 24.1% 11.7%

Return on NetWorth

19.8% 23.1% 22.5% 5.8%

Debt-Equity Ratio
EPS

0.94 0.75 0.98 1.42

55.40 79.26 92.42 24.52

PE

5.60 6.22 8.86 8.69

(Appendix 8)
JSW Steel merger took place in the year 2007-08 and post merger the
shareholders wealth has not increased. The operating margins for the
company have shown a tremendous drop of 8% in the last four years.
Similarly the gross operating margins have dipped over 12% from 28% in
2005-06 to 16% in 2008-09. The most significant impact was on Net profit
margin. The shareholders of JSW who have witnessed 14% of net profit
margin are now able to live with a margin of 3% post merger. Shareholders
wealth got further deteriorated with sharp fall in return on net worth and
return on capital employed.EPS ofJSW steel has taken a serious beating
withRs 55.4
6-

in 2005-06 to Rs 24.5 in 2008-09. The company is trading at a multiple of

8.6 times its earnings however compared to SAIL it seems undervalued
because of its dip in net profit margin and EPS. The post merger scenario
has not been financially healthy for theshareholders ofJSWSteel.

All the four industries and the merger studied under that have shown the
results which state that on most of the indicators shareholders have not
been able to create wealth for themselves. On certain specific mergers the
EPS parameter has been positive however overall the merger has not been
in the favour of the shareholders as it has failed to create wealth for its
shareholders. On this basis it can be inferred that post mergershareholders
oftheacquiringfirm donot createanyform ofwealthforthem.

7-

ChapterFive

Conclusion

Mergers have been the prime reason by which companies around the
world have been growing. The inorganic route has been adopted by
companies forced by immense competition, need to enter new markets,
saturation in domestic markets, thrust to grow big and maximize profits for
shareholders. In the changing market scenario it has become very
important for firms to maximise wealth for shareholders. Many researchers
have shown significant findings out of their research. The Hubris
hypothesis in fact states that the announcement of a merger or acquisition
does not lead to return for shareholders since the acquisition would only
lead to transfer of the wealthfrom thebidding shareholders tothetarget
shareholders.
Anumber of studies have been done in various countries across the world
to find out whether mergers and acquisitions create maximization of
wealth for shareholders. Empirical studies were done by Surujit Kaur
(2002) for a sample of 20 companies between the period 1997 and 2000 to
studythe financial performance of the acquiring firm 3 years before and
after the merger. The study shows that the acquiring firm was not able to
create enough wealth for shareholders post acquisition. Another study was
conducted byBeena (2004) which studied 115 manufacturingcompanies in
the period 1995 and 2000. The study found out that the acquiring firms
were not able to create significant wealthforits shareholders post
acquisition.

8-

ResearchStudy Abnormal Return SampleSize PeriodUnderStudy

Langetieg(1978) -1.6% 149 Between1929-69 Dodd(1980) -1.2% 66
Between1970-77
Jennings, Mazzeo
(1991)

-0.8% 350 Between1979-85

Mulherin and
Boone(2000)

-0.36% 280 Between 19901999

Ghosh (2002) -0.95% 140 Between 1985- 1999

From the above research done in the past it can be seen that post merger
performance has beennegativeforthe acquiringfirm.
This research has been carried out in four sectors namely aviation, banking
and finance,oil and gas andsteel.
Within the airline space it was seen that the acquiring firms i.e. Jet Airways
and Kingfisher Airlines were not able to create significant wealth for its
shareholders. Jet Airways Operating Margin started dipping from a high of
33% pre merger in 2004-05 to 5.2% in 2008-09. Similarly gross operating
margin, net profit margin, return on net worth, and EPS started going down
significantly. This was also accompanies by a high debt to equity ratio for
Jet Airways. A similar post performance analysis was also seen for
Kingfisher

Airlines

who

deteriorated

the

shareholders

wealth

considerably.All thefinancial parameters were goingdownpost merger.

The banking sector in India is said to be one of the strongest sector at
present in the global scenario. Both the acquiring firms i.e. HDFC Bank and
Oriental Bank of Commerce saw positive financial ratios post acquisition
however when compared to the pre merger figures it had gone down
significantly. Return on net Worth for both the firms went down post
merger. However only the EPS remained positive for both the companies
and quite stagnant compared to pre merger. Overall the post merger
9-

performance was not able to create enough wealth for shareholders

because of dip in net profit margins andnet worth.
The steel sector was studied with mergers done by acquiring firms like JSW
Steel and SAIL. It was found that EPS for SAIL had gone up post merger
creating value for shareholders however the performance post merger
from JSW Steel showed that EPS had fallen significantly. SAIL went positive
post merger on parameters like Operating Profit Margin, Net Profit Margin
and Return on Capital Employed. However the situationform JSW was
theopposite.
Oil and Gas was another sector which was studied for the research. The
merger of acquiring firms i.e. IOCL and RIL were studied. RIL was only able
to create high level of EPS for the shareholders and failed to succeed on
other parameters post acquisition. Its Return on Net Worth,Returnon
Capital Employed,Gross Margin,Net Margin had reduced significantly post
merger. Similar results were also obtained for IOCL who was not able to
prove its strength on the financial parameters chosen for thestudy.TheEPS
of IOCLwent downbyhalfpost merger.
It can be clearly concluded that other than the steel sector on certain
parameters, mergers have not been able to create enough shareholders
wealth for the acquiring firm. The results are in line with the studies
conducted by researchers like Surujit Kaur(2002)and Beena(2004).
Overall the study conducted by the researcher shows that financial
performance

and

acquiring

companys

shareholders

wealth

gets

deteriorated post acquisition. However the aviation, banking, oil and gas
and steel sector were further analyzed with the help of an interview. It was
understood from the interview that operationally and financially the
merger would prove successful in the long run as it offers great synergies
totheshareholders ofboththeacquiringfirm and thetarget firm.
The research had analyzed specific acquiring cases and the findings have
been constant. It has been seen that synergistically the mergers have
been very strong and looks very definite to drive value for the

shareholders of the acquiring firms shareholders.

0-

Mergers and Acquisitions are entered into for creating a win-win situation
for all the concerned stakeholders of the company. The overall research
has discussed the way mergers and acquisitions are created and their
analysis of the pre and post financial performance has been studied.The
studyhas shownthat in the Indian context mergers and acquisitions havent
been able to create enough shareholder wealth post acquisition for the
combined entity. However the research has also examined factors beyond
financial analysis which shows that there is a lot of synergy in the form of
geographical spread, increased customer space, growth in size and scale,
access to new markets, cutting costs in operational terms and reduction in
areas where overlap was witnessed.
To conclude mergers and acquisitions donot createimmediateshareholder
wealthand margins for the acquiring firm in the immediate short term.
However from a longer perspective a consolidatedcompanywould be ableto
better

copeupwith

competition,

increasedpressuretocut

andgrowinthechangingbusiness environment.

costs

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2-

Appendix
1.

Source(
www.myiris.com, www.icicidirect.com,
www.moneycontrol.com,Company Annual
Reports)

2.

Source(
www.myiris.com, www.icicidirect.com,
www.moneycontrol.com,Company Annual
Reports)
3-

3.

Source(
www.myiris.com, www.icicidirect.com,
www.moneycontrol.com,Company Annual
Reports)

4.

Source(
www.myiris.com, www.icicidirect.com,
www.moneycontrol.com,Company Annual
Reports)

4-

5.

Source(
www.myiris.com, www.icicidirect.com,
www.moneycontrol.com,Company Annual
Reports)

6.

Source(
www.myiris.com, www.icicidirect.com,
www.moneycontrol.com,Company Annual
Reports)

5-

7.

Source(
www.myiris.com, www.icicidirect.com,
www.moneycontrol.com,Company Annual
Reports)

8.

Source(
www.myiris.com, www.icicidirect.com,
www.moneycontrol.com,Company Annual
Reports)
6-

9.
InterviewforHDFC andCBOPMerger
From:
Sent:
To:

DearRohit
WithrespecttotheteleconpertainingtomergersandacquisitionbetweenHDFC
Bankand
CBOP.Youcannoteafactthatthismergerwouldcreatewavesinthebankingindus
tryin
IndiaandwillfurtherspurttheM&Aactivitywithinthebankingspace.Boththeba
nksshare
tremendousexperienceinthebankingspaceandhavepreviousmergerexperie
nceaswell.
HDFCBanktookoverTimesBankfewyearsBankandCBOPitselfisaconsolidation
of LordKrishnaBankandCenturionbankwithBankofPunjabtomakeitCBOP.The
consolidationbetweenHDFCBankandCBOPwillgenerategreaterrevenues,red
uce
operationalcostduetoclosingfewoverlappingbranchesandservicedeliverypo
ints.
Furtherthebranchexpansion,increaseinnetinterestincome,increaseinfeebas
edincome,
increaseinCASAgrowth,increaseincustomerportfoliowillallleadtohighergrow
thinthe comingtime.
ThemajorchallengewhatIseefromthemergerispertainingtotheNPAclassifi
cationof CBOPportfoliowhichwillcreatestressonHDFCBank'sbooks.
OverallthemergerofourBankwithCBOPisavaluebasedmergerwhichwillincrea
sesize
andscaleofHDFCBankandcreateshareholdervalueinlongerterm.Lastlyjustwa
ntto
highlightthetremendousseniormanagementpotentialwhichCBOPpreviously
hadand
whichisnowinheritedbyus.Thisincludesmanagerswithpreviousexperiencewit
hCitibank andotherforeignbanks.
Inabroaderviewwehavemadeamergerwhichwilladdvaluetoourbankan
dallthe stakeholdersinthenearfuture.
LIMITATION:

The interviews for the same companies were conducted from some of the

top names in the industry. However to ensure that the data holds enough
validity and reliability, the researcher asked for a written matter on the
subject from the official email address of the company. Based on which
HDFC Bank was the first to give such a letter for academic purpose.
However the limitation pertaining to these interviews was that no company
other than HDFC Bank was giving an official mail to put in records. The
7-

company officials explained that this did not comply with their
confidentiality

norms

andcompanyrules

themergerhadtakenplacequitesometimeback.

since

8-