MUDRA: Journal of Finance and Accounting Volume 5, Issue 2, July-December 2018, pp. 60-69 doi: 10.17492/mudra.v5i2.14330 Effect of Mergers and Acquisitions on Performance of Enterprise Value T. Sathishkumar* and P.N. Assai Tamby** ABSTRACT In this study, we have made an analysis on the impact of Mergers and Acquisitions (M&A) on the performance of Enterprise Value in the post-merger period. For this purpose, ten firms were selected based on the adequacy of data for a period of ten years on a year-to- year basis from 2006-2007 to 2016-2017. The firms, which had gone into the M&A process during the financial year 2011–2012 are also considered for the study. Paired samples t- test is applied to study the mean difference in performance of Enterprise Value of the acquiring firms in the pre-and post-merger periods. From the analysis, it has been found that the acquiring firms drastically improved in stock price and business performance. As a result the acquiring firms are visible among competitors with a capacity to develop into something big in the future and merged firms feel that they have chosen a good acquirer firm. Hence, most of the acquiring firms have significant change in the performance of Enterprise Value in the post-merger period. Keywords: Mergers; Acquisitions; Enterprise value; Post-merger performance; Firm Performance. 1.0 Introduction Enterprise Value (EV) is one of the most important concept in investing for variety of reasons, especially when discussions on Mergers and Acquisitions (M&A) arises. The EV measures the value of the ongoing operations of a company. It attempts to measure the value of a company’s business instead of measuring the value of the company. The EV is used as an alternative to market capitalization and a more accurate estimate to takeover price of a company then the market capitalization. ____________________________ *Corresponding Author; Lecturer in Commerce, GHSS, Neravy, Karaikal, Puducherry, India (E- mail: [email protected]) **Department of Revenue and Disaster Management, Puducherry, India (E-mail: [email protected] ) Effect of Mergers and Acquisitions on Performance of Enterprise Value 61 The EV helps in comparison of companies with different capital structure and stock market investors. It is used to neutralize the risks and accordingly compare the returns expected. With this brief introduction the research paper proposes to analyse the impact of M&A on Performance Enterprise Value in the post-merger period of the acquiring manufacturing firms in India. 2.0 Review of Literature Levine and Aaronovitch (1981) concluded that there was no evidence of any significant difference between the acquiring and target firms for the profit related variables and their growth. Ikeda and Do (1983) tested the operating performance by using parameters such as profitability, efficiency, growth, and research development and found that the financial performance in respect of profitability was higher in the post-merger period. Scherer (1988) revealed that most of the firms did not show significant improvement in long-term profitability after M&A. Healy et al. (1992) found that the merged firms registered improvement in the post-merger operating performance in comparison to that of their industry peers, these increases from improvements in asset productivity. Lee et al. (1996) revealed that the horizontal acquisitions showed the strongest predictive ability with the variables such as long-term debt / total assets, long- term debt / market value, market value / book value, and asset growth and sales growth showing significance in the post-merger period. Rau and Vermaelon (1998) found that the acquiring firms under-perform during the three years after M&A while tender offers earned a small but statistically significant positive abnormal return. However, the long- term performance of acquiring firms, due to M&A, is not uniform across the firms which went for M&A. Pawaskar (2001) elucidated that the acquiring firms were at the lower end in terms of growth, tax and liquidity of the industry, and the target firms performed better than that of the industry in terms of profitability. Martynova et al. (2007) found that the acquiring and target firms significantly outperformed the median peers in the industry prior to the takeover event, but the profitability of the combined firm decreased significantly following the takeover. Kar et al. (2014) elucidated that the throughout the period of study, turnover increased after the companies experienced an merger and acquisition which is in line with the findings that Indian companies grew in size and attained bigger market share. Merger and acquisitions did not have any impact on return on net worth for the period of study. Mixed results have been reported for other variables. Kar and Soni (2016) concluded that the analysis can throw some light on the strategic acumen of Indian IT companies. Kalsie and Nagpal (2017) found that the Kotak Mahindra-ING Vysya Bank and Sun Pharma- 62 MUDRA: Journal of Finance and Accounting, Volume 5, Issue 2, Jul-Dec 2018 Ranbaxy deals were able to realise most of the synergies that were estimated and were on the right track towards synergy realisation in the post-acquisition period. However, the Amtek Auto-JMT Auto deal couldn’t realise cost synergies as their expenditures elevated to high levels after the merger but it managed to attain lower cost of capital financial synergies. On the other hand, Express Scripts-Medco deal badly failed because it couldn’t attain revenue synergies after the merger. Sathishkumar (2017) proved that in the post-merger period the acquiring manufacturing firms had the calibre to earn more & sustainable profit, to survive, to grow over a long-run period, the ability to pay interest, taxes & dividends, and more efficient management in utilizing its asset and equity. The previous studies, by and large, attempted to study the short-run impact, say three years prior to and after the M&A period. Moreover, most of the previous studies undertook almost similar research methods to evaluate firm performance in the pre-and post-merger periods. With these evidences and supports the present study is an attempt to measure the impact of M&A on the Performance of Enterprise Value in the long-run, say five years prior to merger year and five years after the merger year. The present paper attempts to overcome the limitations of the previous studies. Hence, the present paper aims at to fulfil the research gap in the existing literature in terms of applying Enterprise Value to analyse the shift-in-structure (impact) in the Performance of Enterprise Value due to M&A. 3.0 Research Methodology 3.1 Objectives and hypotheses The primary objective of the study is to examine the effect of M&A on Performance of Enterprise Value (PEV) in respect of Enterprise Value, Enterprise Value to Net Operating Revenue, and Enterprise Value to EBITDA of manufacturing firms in India after merger. The study has further attempted to investigate and test if there is any significant change in the results achieved by the manufacturing firms due to M&A. Based on the objective, the following hypothesis is developed: H0 = There is no significant mean difference between the performance of enterprise value of manufacturing firms in India before and after the M&A process. 3.2 Data source and period of the study The study used secondary sources of data, which were collected from the capital market database called Centre for Monitoring Indian Economy Private Limited (Prowess CMIE). Data on the PEV for a period of five years prior to the merger year (2007–2011) and five years after the merger year (2013-2017) for each manufacturing firm was Effect of Mergers and Acquisitions on Performance of Enterprise Value 63 collected. Hence, the study period is restricted to ten years ranging from 2006–2007 to 2016–2017 considering the year 2011–2012 as the year of the M&A deal. 3.3 Sampling procedure In this study, multi-stage sampling technique is used. A total of seventy-three firms in the manufacturing and service industries had gone into the M&A deal during the financial year 2011–2012. Out of seventy-three firms, twenty-four firms only completed the M&A deal during the financial year 2011–2012. Out of the twenty-four firms, one firm was eliminated because they did a subsequent merger with another target firm in the same financial year, reducing the number of firms to twenty-three at a further stage. Out of twenty-three firms, fifteen firms fall under the manufacturing sector and eight firms fall under the service sector; hence, fifteen firms of the manufacturing sector alone are taken into account for further stages. Out of the fifteen firms, full-fledged data were available only for ten firms in the manufacturing sector. Hence, the final sample comprises ten manufacturing firms only. 3.4 Hypothesis testing A paired sample t-test is used to study the pre-and post-merger PEV ratios and these are compared to know if there is any significant change in PEV due to M&A. 4.0 Analysis and Results 4.1 Impact of M&A on Performance of Enterprise Value of Manufacturing Firms The performance of Enterprise Value (PEV) in terms of Enterprise Value (EV), Enterprise Value to Net Operating Revenue (EV_NOR), and Enterprise Value to EBITDA (EV_EBITDA) between the pre-merger and post-merger periods have been computed to analyse the impact of M&A on the PEV of the firms. The results of the analysis are shown in Tables 1 to 3. Enterprise Value (EV) is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization.