Foreign mergers and acquisitions and performance of domestic operations

Abstract

The given work on “Foreign Mergers & Acquisitions and Performance of Domestic Operations” studies the impact of foreign mergers and acquisitions on performance on Indian companies. For this purpose, the Indian pharmaceutical industry and IT industry were considered for study. The raw data comprising of all the mergers and acquisitions between 2000 and 2009 was downloaded from the Thomson SDC platinum database for both IT and Pharmaceutical industries. The acquiring entities were then arranged into merged only abroad, merged only in India, merged in India and abroad. The key financial ratios of all the listed companies in the IT and pharmaceutical sector were downloaded from Capitaline. The comparison of performance has been based on four key ratios: ROCE, RONW, D/E ratio and PBIDTM. It was also checked if the merged companies were already performing well before undertaking the merger & acquisition. The companies which underwent M&A abroad showed a little improvement in its returns ratios like ROCE & RONW. At times, they even performed worse than that of unmerged companies. It clearly suggests that there is little improvement in operational efficiency. But, the variation in these returns was the least. It indicates the mitigation of risk by having products & geographical diversification. Most of foreign mergers are not successful. It is mainly due to CEO hubris and trying to gain short term gains. The foreign mergers are not generally done only to improve the operational efficiency of a company. There are also other important factors. They may be market seeking, efficiency seeking, resource seeking or strategic asset seeking. It may be for widening the portfolio of market, access to capital & brand and acquiring new capabilities & skills. A firm in a developing economy should opt for mergers both within the country and abroad. It makes a perfect balance between the risk and return for the shareholders of the company. The market in a developing economy will give higher returns owing to huge opportunities in the market and mitigate the risk by diversifying the portfolio in products and across the geographies.