Does the merger improve the operating performance of the company? Evidence from the beverage industry in India

Introduction

Mergers and acquisitions (M&As) in India peaked its activity levels in 2021. Many first-time buyers and an increase in industry disruptors, or insurgents, that too across multiple sectors and business activities, is what led M&As to reach such high levels (Dezan Shira & Associates, 2022). This illustrates how the global economy is undergoing strong upheaval. In reality, this serves as a response to the changes brought about by rapid technological advancements, lower communication and transportation costs that led to the emergence of a global market, elevated competition, the emanation of new industries, a supportive financial and economic environment, and the liberalisation of the majority of economies, which too serve as motivators for mergers (Tambi, 2005). Now a day, corporations across the globe are frequently using M&As as a business restructuring tactic. There are many studies investigating the merger phenomena, in line with the growing M&A trends (Boateng et al., 2011).

The fact that it is challenging to determine how a merger impacts the financial results of a company is a significant obstacle in completing this assignment. An alteration in profitability might have a number of causes. Mergers may produce an all-around effective reaction to a supply or demand shock in the market. They may also provide a chance to obtain cutting-edge technology or to realise economies of scale.

Even if they are significant, mergers’ impacts are still up for debate. The “market for corporate control,” which sees M&As as ways to transfer underperforming assets to companies that can use them more effectively and therefore realise the value gain, is referred to by proponents. Sceptics point out that while many mergers can be benign or advantageous, others may be driven by market dominance, arrogance, or unintentional errors, all of which have a negative impact on society. Each viewpoint is supported by evidence. The efficient-merger hypothesis appears to be supported by the regular discovery of shareholder advantages from mergers, at least in the short term, in stock market event studies. On the other hand, studies of the actual operational consequences more frequently seem to reveal that merger advantages are the exception as opposed to the rule.

Literature review

Our study assesses the consequences of mergers on competition. Various studies have found varying effects from mergers in various industries, which is not surprising. A variety of research has been conducted about the association between M&As and business performances (Bi Z., 2016). Using several types of financial (such as profits and stock prices) and non-financial (such as the reputations of the firms) indicators and of course, the time periods (such as initial market reaction to the M&As, pre and post-measurement, etc.). According to these studies, M&A deals often benefit the target’s shareholders more than the acquirer’s shareholders. In reality, the performance of the buying firm generated a variety of outcomes (Schweiger and Very, 2003).

The 50 biggest mergers in the US between 1979 and 1984 were quantified and their cash flow performance was assessed by Healy, Palepu, and Ruback in 1992. They found that, compared to their respective industries, the operating performance of merging companies substantially enhanced in post-merger period (Healy et al., 1992).

In 1983, Katsuhiko Ikeda et al. examined the financial results of forty-three (43) combining enterprises from the manufacturing sector in Japan. In more than half of the cases, they noticed an increased Return on Equity (RoE), whereas only approximately half the cases saw an improvement in the rate of return on total assets. However, “both profit rates improved in more than half of the cases in the five-year test, indicating that improvements in firm performance after mergers began in line with internal adjustments made by the merging firms. This suggests that there was a necessary gestation period during which merging firms learned how to manage their new businesses” (Ikeda and Doi, 1983).

The impact of M&As on the financial health of 40 United Kingdom corporations were researched by Jallow, Masazing, and Basit (2017) between the years of 2006 and 2010. According to the analysis, M&As had “a large influence on ROA, ROE, and EPS but a negligible impact on NPM”. The study concluded that a lack of managerial effectiveness, an inefficient utilisation of shareholders’ funds, and escalated financial costs are responsible for companies’ insignificant decreases in Return on Assets (RoAs) and RoEs after the mergers took place (Jallow et al., 2017).

Between 1995 and 2000, Beena (2000) used a set of financial ratios 4 and a t-test to compare the performances of a sample of 115 acquirers, from Indian industrial sector, before and after the merger. “The investigation was unable to identify any proof that the financial ratios for the acquiring corporations had improved in the post-merger era compared to the pre-merger period” (Beena, 2000).

The financial holding companies’ post-merger banks generated merger synergies. The top 10 banks in financial holding companies and top 10 banks in non-financial holding companies revealed that 3 out of the top 10 financial holding company banks were founded in the banking industry and are connected to financial holding companies that place a strong emphasis on banking. This finding indicates that financial holding companies perform better overall, post-merger, if banking is their primary operating entity (Liu, 2010).

The study examines a few financial parameters (ratios) before and after a merger of Indian F&B industry acquiring firms to determine the effects of M&As on their operating financial results. The outcome refers to a minor, but not statistically significant, improvement in profitability ratios in the food industry. While the return on invested capital and net worth have decreased. In the post-merger period, both the food and beverage industries have seen a negligible hike in leverage. Post-merger, the combined performance of the food and beverage companies improved significantly, but statistical analysis cannot determine whether the mean of the two variables differed significantly (Mahamuni and Jumle, 2012).

Mahamuni and Jumle, in 2018, carried out a study of manufacturing machinery and metal products firms to verify if M&A activity helps the firms in improving their performances after the merger in terms of parameters like improvements in liquidity position, better solvency scenarios, expansion of their businesses, overall improvement in profitability. The result revealed that manufacturing companies which merged “did not achieve liquidity, solvency, profitability after merger”. Also, it is seen that after the merger, the operating results of the combined manufacturing firms has not improved. But the merged companies, post-merger, expanded their business activities (Mahamuni and Jumle, 2018).

According to research carried out by Pramod Mantravadi and A Vidyadhar Reddy (2008), mergers appear to have experienced “a marginally positive impact on the profitability of businesses in the banking and finance sector, while they had a marginally negative impact on operating performance (in terms of profitability and returns on investment) for businesses in the pharmaceutical, textile, and electrical equipment sectors”. In terms of profitability margins, ROI, and asset values, the Chemicals and Agri-products industries had experienced a significant decrease due to mergers (Mantravadi and Reddy, 2008).

The study by Ahmad Ismail, Ian Davidson, and Regina Frank (2009), is focused on European banks. It examined operating performance following the merger event, and found that the industry-adjusted average cash flow return was not substantially changed after the merger but remained positive. Additionally, it was observed, low profitability, conservative credit policies, and robust cost-efficiency status in pre-merger period, which provided the source for increasing these returns post-merger are the major predictors of industry-adjusted cash flow returns (Ismail et al., 2009).

Mahesh Kumar Tambi (2005) took forty companies’ database from CMIE’s PROWESS and applied a paired t-test for mean differences for 4 parameters viz. total performance improvement, economies of scale, operating synergy and financial synergy. He investigated the impact of mergers on Indian enterprises. The investigation indicates that Indian companies are comparable to those in various places of the globe and that mergers did not significantly increase performance (Tambi, 2005).

Using measures 5 of profitability, growth, leverage, and liquidity, Pawaskar V. (2001) focused on the before and after the merger operating performance of 36 acquiring firms between 1992–1995 and revealed that these firms surpassed the profitability average for the sector. Regression analysis, though, discovered that growth in the profitability did not shown growth following the merger period when compared to the acquiring firms’ top rivals (Pawaskar, 2001).

Sinha, Kaushik and Timcy (2010) conducted the study to measure Post Merger and Acquisition Performance. Through this research, they investigated selected organizations from Financial Sector in India. With an aim to understand how M&As sway the financial performance of the select Indian ‘Financial Institutions’. The researchers discovered that M&As incidents in India showed “a significant correlation between financial performance and the M&A deal”, in the long-run, along with the fact that the acquiring firms could generate value (Sinha et al., 2010).

According to a 2009 study by Murugesan, Manivannan, Gunasekaran, and Bennet titled “Impact of Mergers on the Corporate Performance of Acquirer and Target Companies in India,” the acquirer businesses’ shareholders improved their liquidity performance following the merger event (Selvam et al., 2009).

Marina Martynova, Sjoerd Oosting and Luc Renneboog (2006) looked at the long-term profitability of business takeovers in Europe and observed that “both acquiring and target companies significantly outperformed the median peers in their industry prior to the takeovers, but the profitability of the combined firm decreased significantly following the takeover” (Marina et al., 2006).

From 1993 to 2010, Sinha and Gupta (2011) examined the effects of M&As on the Indian financial sector. 80 companies that went through M&A over the past 18 years were examined in the study. The reveals that M&As had ‘a favorable impact on profitability’ represented by the net profit and the ratio of profit before interest, tax, depreciation and amortization (PBITDA), ‘a negative effect on liquidity’, also decreased total and systematic risk (Sinha and Gupta, 2011).

Abdullah Mamun, George Tannous, Sicong Zhang (2021) studied how bank mergers (regulatory mergers) performed (operating) post-merger during and after the 2008-2009 financial crisis. Up to two years after the acquisition, regulated mergers are seen to significantly increase profitability and cost effectiveness. In comparison with rivals who were not involved in the merger, these improvements are significantly higher. However, the operating result of non-regulatory mergers following the merger does not differ substantially from that of their non-merger peers (Mamun et al., 2021).

The impact of mergers when businesses compete on pricing and cost-cutting efforts was examined by Motta and Tarantino (2021). They discover that following the merger, overall investments and consumer surpluses are lower when efficiency benefits are missing. Only when efficiency improvements are substantial enough are the impacts of a merger competitively advantageous. The effect of horizontal mergers that lead to monopolies on businesses’ incentives to engage in demand-enhancing innovation is examined to discover that a merger’s overall effect on innovation might be either favourable or unfavourable (Motta and Tarantino, 2021).

Numerous research papers have been examined, and it has been determined that the impacts on financial results are inconsistent, mixed, and different depending on the industry. The fact that the researchers’ methodologies varied made it difficult to summarise their findings, as in some of their results, they used a variety of variables, parameters, and financial information. Financial performance metrics were employed in several studies. The majority of studies that employed financial performance measures found no appreciable differences (on either side) between the financial performance prior to and following the M&A.

These preceding works of research might be used to draw the conclusion that mergers generally do not appear to enhance the post-merger efficiency of acquirers. Gains are either negligible or non-existent by various measurements. Event studies and accounting both fail to provide any proof of value generation. This study’s goal is to investigate these theories in the context of India. There are few studies on the performance following a merger of Indian corporations and consequently a large knowledge gap in this field. The operating efficiency technique is utilised in this study to determine how a merger will affect the efficiency of acquiring organisations.

Research objectives

Based on the literature review, the researcher frames the objective and the hypothesis to carry-out the study as below;

Objective: To measure, compare and study the merger’s impact on the operating performance.

Hypothesis: Merged firms have improved their operating performances.

Methods

According to several merger studies, evaluating and comparing the merged firms to a similar industry group that is based on the performance before and after the merger is an effective way to find operating performance improvements (Behr & Heid, 2011; Fee & Thomas, 2004; Ghosh, 2001; Powell & Stark, 2005). The operating performance is assessed on six operating parameter (ratios) i.e. Operating Profit Margin, Gross and Net Profit Margin, Debt-Equity, Return on Net Worth and Capital Employed. The required financial data are extracted through the Centre for Monitoring Indian Economy (CMIE) Prowess Database. The comparison of three years pre and post-merger period of these operating ratios (Aggarwal and Garg, 2022).

Results and discussions

Study of historical cases of Mergers and Acquisitions have established the changes in financial performance of the restructured firms. However, the previous studies and the current paper confirm that the firm’s performance in terms of profitability, liquidity, and solvency does not show any significant improvement in the short run in the post-merger period. The present study of post-merger activity’s long-term effects may add interesting results which can yield a future research dimension.

Hypotheses testing

The hypothesis that the Operating performance of the merged firms has improved has been rejected after examining the results mentioned above. As Table 7 clearly indicates, the sample companies’ operating performance has declined as a result of the merger activity they undertook. It reveals a negative impact on the sample companies’ overall profitability over the post-merger period.

Table 7. Overview of the Performance Parameters.

Performance Parameters	UBL	USL
Operating Profit Margin
Gross Profit Margin
Net Profit Margin
Return on Net Worth
Return on Capital Employed
Debt – Equity Ratio

The representative sample firms from the beverage industry’s post-merger operating performance is declining. Profitability ratios are declining along with general falloffs in returns on net worth and capital invested. The earnings ratios for United Breweries Limited have somewhat improved, albeit not statistically significantly. For United Spirits Limited, the return on net worth and investment made has declined. A negligible increase can be observed in leverages of both of the firms that belong to the Indian beverage sector that were picked during the period following the merger. On the reverse hand, this ratio of debt to equity has decreased dramatically since the merger compared to prior. It suggests that debt rather than equity is used to fund a large part of assets in the post-merger era. It demonstrates that these businesses are increasing their debt loads as a result of merger activity. Overall, it can be said that there was a negative on operating performance by the merger activity done by these two representative sample businesses in India’s beverage industry.

One may draw the conclusion that the three financial variables included in this study do not statistically significantly vary the operating results after merging. The null hypothesis is true because all estimated t-values are lower than (or more on the negative side of) the table value. This outcome indicates that merger activities do not affect the acquired businesses’ operational performance.

Another reason why profitability did not increase after a merger is because acquisition of a company could have led to “managerial control loss problems.” One may argue that the acquirers encounter unforeseen difficulties while handling and integrating their purchases. The acquiring leadership loses control and is unable to manage the merged firm effectively as it grows more complex. After a merger, profitability levels fall as a result of this loss of control.

Conclusion

This research work was conducted to better understand the impact of M&As activity on operating financial results. This study shows that the M&As have not had a good effect on a company’s operating performance, especially for the chosen beverage companies in India. Despite the limited favourable effects, they are statistically negligible.

Although there are many motivations for a firm to participate in merger activity, our aim in this search was to understand one crucial feature of M&A activity. It might be difficult to interpret the conclusion or get insights from the quantitative information when these motives or reasons are qualitative. Additionally, it has been noted from several studies that merger and acquisition efforts for numerous organisations in their post-merger phase did not result in beneficial short-term effects. However, if the companies do not conduct thorough research before deciding on M&As, it will not meet their expectations or the objectives for the activity.

By calculating it and comparing it to the average for an industry or sector, subsequent studies in this area may expand on the present study. Any variations, if any, may then be further investigated to get a better understanding. The results of research demonstrating inferior performance in the post-merger era might be compared and connected to post-merger return to investors of acquiring corporations who are part of mergers taking place in India.

Previous studies have shown that there was no significant improvement in business performance. It was discovered that merger-induced changes in a company’s industry-adjusted profitability, asset efficiency, and solvency status were statistically negligible. This finding suggests that mergers do not increase the acquirers’ operating performance. These empirical findings allow us to draw the conclusion that merger decisions are not made with the intention of maximising shareholder value through increased profitability. The pursuit of larger scale, market consolidation, and empire building may have served as inspirations for merger choices.

There may occasionally be unstated goals, such as the post-merger asset stripping of the target firm that provides the promoters with a significant cash premium over and above the net worth.

In order to accomplish the true goals of the merger, management must continue to concentrate on the company’s operations, especially the post-merger integration phase.

Industry mergers and acquisitions do not appear to be slowing down. Why do businesses choose mergers and acquisitions (M&A) when, on average, data shows that doing so would hurt them more than help the target? It appears to point to some issues with the conceptual framework, the technique, or the accuracy of the data. This topic may be explored in more detail.

Financial metrics may not fully reflect the impact of mergers on business performance or reveal the driving forces behind M&A decisions. Therefore, in future research, the post-merger performance gains might be examined in terms of some additional criteria including social value provided, improvements in gains to other stakeholders of the firms engaging in M&A, and advantages at the industry and economy level at both the national and worldwide levels.