Long-term Post-merger Performance of Firms in India
Authors: Ramakrishnan K 
Published: June 2019

Mergers are important corporate strategy actions that, among other things, aid the firm in external growth and provide it competitive advantage. This area has spawned a vast amount of literature over the past half a century, especially in the developed economies of the world. India too has been seeing a growth in the number of mergers over the past one-and-a-half decades since economic liberalization and financial reforms were introduced in 1991. Studies on the post-merger long-term performance of firms in both the developed and the developing markets have not been able to come to a definite and convincing conclusion about whether mergers have helped or hindered firm performance. Our literature review shows that mergers do not appear to be resulting in favourable financial performance of firms in the long-term in the markets where they are a fairly recent phenomenon.

The economic liberalization and reforms initiated in 1991 in India have served to trigger corporate restructuring through M&As. The removal of industrial licensing, lifting of monopoly provisions under the MRTP Act, easing of foreign investment, encouraging the import of raw materials, capital goods, and technology have increased the competition in Indian industry. Firms are free to fix their capacity, technology, location, etc., to enhance their efficiency. The amendment of the MRTPA has made it possible for group companies to consolidate through mergers eliminating duplication of resources and bringing down costs. M&A has now become a viable strategy for growth in India.

Immediately after liberalization, Indian industry added capacity since it expected a rapidly expanding market due to the perceived latent demands of the vast middle class. But the lower income groups could not participate in the consumer goods market. The economy began to slow down from 1996. This squeezed the profit margins of local firms that now had excess capacities. Industry saw a spate of restructuring in the form of shedding non-core activities in favour of core competencies and expansion through M&As, in a bid for survival. According to market reformers, growth is the result of efficient utilization of resources on the supply side. In a free market economy, utilization becomes more efficient due to competition. It is thus hypothesized that -- Mergers in India have resulted in improved long-term post-merger firm operating performance through enhanced efficiency.

Statistically analysed cash flow accounting measures were used to study whether firm performance improved in the long-term post-merger. This research, on a sample of 87 domestic mergers, validates the hypothesis: Efficiency appears to have improved post-merger lending synergistic benefits to the merged entities. Synergistic benefits appear to have accrued due to the transformation of the hitherto uncompetitive, fragmented nature of Indian firms before merger, into consolidated and operationally more viable business units. This improved operating cash flow return is on account of improvements in the post-merger operating margins of the firms, though not of the efficient utilization of the assets to generate higher sales.