30-04-2012, 04:24 PM
Financial Performance of Indian Manufacturing Companies
During Pre and Post Merger
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Introduction
A company may grow internally, or externally. The objective of the firm in either case is to maximize
the wealth of the existing shareholders. Most corporate growth occurs by internal expansion, which
takes place when a firm’s existing divisions grow through normal capital budgeting activities. The
mergers, takeovers, divestitures, spin-offs and so on, referred to collectively as Corporate
Restructuring, have become a major force in the financial and economic environment all over the
world. The industrial restructuring has raised important issues both for business decisions as well as for
public policy formulation. On the more positive side, M & As may be critical to the healthy expansion
of business firms as they evolve through successive stages of growth and development.
Mergers in Manufacturing Sector in India
Since 1991, Indian industries have been increasingly exposed to both domestic and international
competition. The competitiveness has become an imperative for survival. Hence, in recent times,
companies have started restructuring their operations around their core business activities through M &
As. Indian manufacturing industry is classified into seven categories - Food & Beverages, Textiles,
Chemicals, Non-Metallic Mineral Products, Metal and Metallic Products, Machinery, Miscellaneous
Manufacturing and Diversified.
Leverage Parameters (Solvency)
The leverage is the ability of a company to use funds to enhance the returns to its investors. Leverage
results from the company employing funds or source of funds, which has a fixed cost (or returns). It
should be noted that the fixed cost or the returns is the fulcrum of leverage. If a manufacturing
company is not required to pay fixed cost or fixed returns, there will be no leverage. Since fixed cost or
returns has to be paid or incurred, such cost or returns may influence the amount of profits available to
the shareholders. A high degree of leverage implies that there will be a large change in profits due to a
relatively small change in interest. Thus, higher the leverage, higher the risk and higher the expected
returns. To know the degree of leverage of manufacturing sectors, the ratios used are total debt and
equity to total assets, total borrowings and equity to EBITD and interest coverage ratio.
Limitations of the Study
The study is mainly based on secondary data. The study is confined to only manufacturing sectors that
are categorized into food & beverages, textiles, chemicals, non-metallic mineral products, metal &
metallic products, machinery and miscellaneous manufacturing & diversified. This study is limited to
17 companies (30% of total companies) out of 58 companies, which have undergone mergers and
acquisitions during 2000, 2001 and 2002. In the absence of more reliable data, CMIE data on M & As
are used in this study. The study is undertaken only for the pre merger period of three years and post
merger period of three years.
Conclusion
It is evident from the above analysis that both the hypotheses set for validation are not fully accepted.
The conclusion emerging from the point of view of financial evaluation is that the merging companies
were taken over by companies with reputed and good management. Therefore, it was possible for the
merged firms to turn around successfully in due course. However it should be tested with a bigger
sample size before coming to a final conclusion.