Study of long-run effects of mergers and acquisitions on the Indian pharmaceutical industry

Abstract

Introduction of deregulatory policy measures in general and competition policies in particularsince 1991 have resulted in a significant increase in the number of mergers and acquisitions(M&A) in Indian corporate sectori. The broad industry groups that have experienced a largenumber of MA include financial and other services, chemicals including drugs andpharmaceuticals, electrical machinery, electronics and beverages including spirits and vinegars,etc.iiThere are two broad theories explaining why firms acquire other firms or merge with other firms.The monopoly theory postulates that the firms use the route M&A to raise their market poweriii,whereas, according to the efficiency theory, M&A are planned and executed to reduce costs byachieving scale economies iv. Either way firms are expected to have better financial performancefollowing MA. In this perspective, this project makes an attempt to examine the impact of M&Aon the long term financial performance of pharmaceutical companies with a sample of 76companies over the period of 1995-06 to 2009-10. We examine a one-year horizon to includeenough time to allow the results of the mergers to become known.The reasons for selecting pharmaceutical industry are of many folds. First, drugs andpharmaceutical industry appears to be one of the most active sectors in the game of MAaccounting for about 8.6 per cent of total mergers and 11.6 per cent of total acquisitions in the1990s.v Also, the Pharmaceutical Policy (2002) coupled with de-licensing of the sector, andremoval of a large number of drugs from price control is expected to create to encourage newinvestment in the sector.The consequences of corporate mergers and acquisitions (M&A) on firm value and performancehave been studied extensively by financial economists. Despite forty years of research, theevidence on this issue is mixed. Do mergers increase or decrease value of the acquiring firm?How do these transactions influence value of the target? Various studies provide conflictinganswers to this question. Hence, there is need for additional research that will resolve thisconflicting evidence. In this study, we are interested in studying the long-run effects of mergersand acquisitions in pharmaceutical industries in India. R&D intensive firms, like pharmaceuticalfirms, are characterized by higher levels of uncertainty about future cash flows. The interactionbetween this uncertainty and M&A activity make this an interesting setting for study. For thepurpose of this study, we have covered mergers and acquisitions of 76 different firms in theIndian pharmaceutical industry over the period of 1995-2009, and tried to understand the extentof value mergers create for the shareholders of the acquirer firm.