CHAPTER 1

THE RESEARCH METHODOLOGY

1.1 Introduction

1.2 Title of the Problem

1.3 Review of literature

1.4 Objectives of the Study

1.5 Data Collection

1.6 Selection of Samples

1.7 Period of the Study

1.8 Hypothesis of the Study

1.9 Tools of Analysis

(A) Ratio Analysis

(B) Statistical Techniques

Average

Index Number

The Standard Deviation

Student T Test

1.10 Significance of the Study

1.11 Outline of Chapter Plan

1.12 Limitations of the Study

CHAPTER 1
THE RESEARCH METHODOLOGY
1. INTRODUCTION :-

financial

Corporate restructuring has become a major component in the

and economic

environment

all

over the world.

Industrial

restructurings have raised important issues for business decisions as well as for

public formulation policy. Since 1991, Indian industries have been increasingly
exposed to both domestic and international competition and competitiveness.

Hence, in recent times companies have started restructuring their operations

around their core business activities through mergers and acquisitions.

2.

TITLE OF THE PROBLEM :It is true that dramatic events like mergers, acquisitions,

takeovers, restructuring and corporate controls occupy the Indian business

news papers almost daily. Further they have become central focus of public
and corporate policy issues. Some assert that the activities of mergers and

acquisitions represent a new force in creativity and productivity. Some other

view it is blight in our economy. Regardless of these views, they do represent a

major trend in the economical environment. This is an area of potential good

as well as potential harm in corporate strategy including manufacturing

industry. Mergers take place due to various motives. There for an analysis has

to be made to compare the financial performance of pre and post merger of

the firms. The title of the problem is as under:

Financial Growth Indicator of Merger and Acquisition in

Indian Corporate Sector
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3. REVIEW OF LITERATURE:
In this study an attempt has been made to briefly review the work

already undertaken and methodology employed. A brief review of selected

studies has been presented as below:

(1) David C. Cheng (1989), in their paper Financial determinants of Bank

Takeovers found that several studies have examined the determinants
of bank merger pricing. Those studies focus on the characteristics of the
target and downplay the characteristics of acquirer. Their study found

that the purchase price is a negative function of the targets capital to

asset ratio. The only variable used in their model is the ratio of acquirer
to target assets.

(2) An empirical study entitled Takeovers as a strategy of turnaround by

Ravi Sanker and Rao K.V. (1998) analysis the implications of takeovers
from the financial point of view with the help of certain parameters like
liquidity, leverage, profitability etc. They observed that a sick company is

takeover by a good management and makes serious attempts; it is

(3)

possible to turnaround successfully.

Ruhani Ali and Gupta G S (1999) in their paper entitled Motivation

and Outcomes of Malaysian takeovers: An international perspective

examine the potential motives and effects of corporate takeovers in

Malaysia. The Mullars methodology, which involves the use accounting

measures like size, growth, profitability, risk and leverage is employed

for the study to analyze the performance characteristics of takeover firms
in the pre and post takeovers periods.

(4) Jay Kumar S. (1999) in his dissertation entitled, Mergers and

Acquisitions: An Evaluation Study examines the relative benefits
expected by a corporate enterprise when they adopts mergers and

acquisitions as a strategy. The author studies the extent to which the

security prices reacted to the announcement of merger.

(5) The working paper entitled, An analysis of merger in the private

corporate sector in India by Beena P. L. (2000) attempts to analyze the

significance of merger and their characteristics. The paper establishes

that acceleration of the merger movement in the early 1990s was

accompanied by the dominance of merger between firms belonging to
the same business group of houses with similar product line.

(6) The dissertation entitled, An Analysis of Mergers and Acquisitions by

Canagavally R. (2000), measures the performance in terms of size,

growth, profitability and risk of the companies before and after merger.

The dissertation also investigates the share prices of sample companies

in response to the announcement of merger.

(7) The paper entitled Merger and Acquisition unlocking value by Huzifa

Husain (2000), explains that takeovers (hostile or non-hostile) may be

beneficial to the shareholders if they unlock the hidden value of a

company. They also help the existing management to the more receptive
to shareholders. Economically, takeovers make sense if the private

market value of a company is higher than the market capitalization of

the company. Further if takeovers are used as a ploy to prevent

competition, it becomes harmful to the economy. Therefore, proper

checks and balances have to be put in place to ensure that takeover
facilitation improves overall efficiency of the economy.

(8) The study entitled, Trumps for M & A Information Technology

Management in a merger and acquisition strategy (2001), found that
success of merger and acquisitions depends on proper integration of
employees, organization culture, IT, products, operations and service of

both the companies. Proper IT integration in merger plays a critical role

in determining how effectively merged organizations are able to

integrate business processes and people, and deliver products and

services to both internal and external customers of the organization. The

study suggests that to address the challenges, Chief Information Officers
should be involved from the earliest phase.
(9)

Mr. Surjit Kaur (2002) in her dissertation entitled, A study of

corporate takeovers in India, examines the M & A activity in India

during the post liberalization period. The study tested the usefulness of
select financial ratios to predict corporate takeovers in India.

(10) The study entitled Mergers and Operating Performance : Indian

Experience (2007) by Pramod Mantravadi and A. Vidyadhar Reddy,
explains that This research study aims to study the impact of m & A on
the operating performance of acquiring corporate in different periods in
India, by examining some pre and post merger financial ratios with

chosen sample firms and mergers between 1991-2003. The result

suggests that there are minor variations in terms of impact on operating

performance following merger in different intervals of time in India.

(11) The paper entitled M & A and Corporate Performance in Japan By

Ryo Kawahara & Fumiko Takeda ICFAI journal of M & A, Sept, 2007, This
paper investigates how M & A affect corporate performance for three
years after their implementation. The corporate performance of 162 M &

A that took place in Japan from 2001-03 is analyzed by using Wilcoxon

signed rank test. They find that overall effects of M & A on corporate
performance are statistically insignificant, compared to the corporate

performance of other companies within the same industry with similar

pre-acquisition performance.

(12) Ruhani Ali and Gupta G S (1999) in their paper entitled, Motivation
and Outcome ofMalaysian Takeovers: An International Perspective
examine the potential motives and effects of corporate takeovers in

Malaysia. The Mullers methodology, which involves the use of

accounting measures like size, growth, profitability, risk and leverage,

is employed for the study to analyze the performance characteristics of

takeover firms in the pre - and post - takeover periods.

(13) The study entitled, LBOs, Corporate Restructuring and The

Incentive- Intensity Hypothesis investigated the argument that

corporate restructuring is an intended outcome of LBO transactions

directly. Using a detailed database on corporate operations, the study

investigated four aspects of corporate restructuring, namely, corporate

downsizing, corporate refocusing, portfolio reorganization and changes

in the industry characteristics of portfolio business. The results of this

study strongly suggest that the governance structure of LBO firms

enables the managers to forge growth more effectively than the

governance structure of public firms. This study analyzed the effects of

LBOs on corporate restructuring activity by analyzing differences in

restructuring activity between 33 large LBO firms and 33 closely
matched public corporations. The evidences presented in the study show
that certain types of corporate restructuring are more prevalent and
extensive in LBO firms than similar ones in public firms.

(14) The study, conducted by Ajay Pandey (2001) in the context of

developed countries, points out the substantial valuation gains for
target firms, particularly in the case of successful takeovers. The

primary motivation for the study was to test whether takeovers are
seen by capital market as creating value to the firm by improving

performance following change in management or as mere replacement

of existing management without any expectation of concomitant

improved managerial and firm performance.

(15) Healy, Palepu, Ruback examined the performance of 50 US mergers

post acquisition using the criteria of cash flow performance and found

that the operating performance of these companies were distinctly

better following acquisitions. But the other claim that the operating
cash flow performance did not improved

4. OBJECTIVES OF THE STUDY:The broad objective of this study is to measure the impact of

mergers and acquisitions on financial growth indicators in Indian Corporate

Sectors. Other objectives of the study are mentioned as under.
1)

To examine and evaluate the impact of mergers and acquisitions on the

liquidity and leverage position of the selected units by some important

parameters of liquidity and leverage management such as:2)

Current Ratio

Current Ratio (Including short-term loan)

Quick Ratio

Inventory Turnover Ratio

Debtors Ratio

Long Term Debt to Equity Ratio

Total Debt to Equity Ratio

Fixed Assets Turnover Ratio etc.

To examine and evaluate the impact of mergers and acquisitions on the

profitability position of the selected companies by some important

parameters of profitability management such as:-

Gross Capital Employed Ratio

Net Capital Employed Ratio

Return on Owners Fund Ratio

Gross Profit Ratio
Net Profit Ratio

Operating Profit Ratio

Earning Per Share Ratio etc.

5. DATA COLLECTION: The study is based on the secondary data taken from the annual

reports of selected units and EMIS data base website. And all the data relating to

history, growth and development of Industries have been collected mainly from
the books and magazine relating to the industry and published paper, report,
article and from the various news papers, bulletins and other various research

reports published by industry and research organization, various web sites like
www. sebi. gov. in, www. indiainfoline.com, www. rbi. Org. in.

The data relating to the selected units under study have been

obtained from prospectus, pamphlets and annual reports of the selected units.

6. SELECTION OF SAMPLES: The study has been carried out on the micro-level, as it is not possible for

the researcher to conduct it on the macro-level. The population of the study

consists of all types of the companies having different operations of business

and totally different nature of industries. As the study is to be carried out by the
individual researcher it is not easy to select all the companies as the samples for

the study. So, the convenient random sampling has been done. As such the
universe of the study is Indian Industries; the researcher has selected 10
companies (Which are top ten mergers and acquisitions during the year 1996 to
2002) as mentioned below:

No.

Company

01

Ambuja Cement Ltd.

03

Gujarat State Fertilizer & Chemicals Ltd.

02
04
05
06
07
08
09
10

Exide Industries Ltd.

India Cement Ind.

Reliance Industries Ltd.

Sterlite Industries (India) Ltd.

Tata Chemical Ltd.
Tata Steel Ltd.
Voltas Ltd.

Zee Entertainment Enterprises Ltd.

7. PERIOD OF THE STUDY:The present study is mainly intended to examine the financial

performance of merged companies five years before merger and five years after
merger.

8. HYPOTHESIS OF THE STUDY: On the basis of data collection, the researcher has identified the

following broader hypothesis for the study:

NULL HYPOTHESIS: 1)
2)
3)

There would be no significant difference in means score of

profitability indicators in selected units, before and after merger and
acquisition.

There would be no significant difference in means score of liquidity

indicators in selected units, before and after merger and acquisition.

There would be no significant difference in means score of leverage

indicators in selected units, before and after merger and acquisition.

ALTERNATE HYPOTHESIS: 1)

There would be significant difference in means score of profitability

2)

There would be significant difference in means score of liquidity

indicators in selected units, before and after merger and acquisition.

indicators in selected units, before and after merger and acquisition.

3)

There would be significant difference in means score of leverage

indicators in selected units, before and after merger and acquisition.

9. TOOLS OF ANALYSIS:(A) Ratio Analysis :

Ratios are among the well known and most widely used

tools of financial analysis. Ratio can be defined as The indicated quotient

of two mathematical expression.1 An operational definition of ratio is the

relationship between one item to another expressed in simple
mathematical form.

(B) Statistical Techniques :(i)

Average :The most commonly used average is the arithmetic mean,

briefly referred to as the mean. The mean can be found by adding all the
variables and dividing it by total number of years taken. It gives a brief

picture of a large group, which it represents and gives a basic of

comparison with other groups.2

(ii)

Index Number :According to Croxton and Crowden Index numbers are

devices for measuring difference in the magnitude of a group of related

variables3

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While as per Morris Hamburg In its simplest form an

index number is nothing more than a relative number or a relative

which expresses the relationship between two figures, where one of the
figures is used as a base.4

(iii) The Standard Deviation :The standard deviation concept was introduced by Karl

Pearson in 1823. It is by far the most important and widely used

measure of studying Dispersion. Standard Deviation is also known as root

mean square deviation for the reason that it is the square root of the

mean of the squared deviation from arithmetic mean. Standard deviation

is denoted by small Greek letter .5 (Read as sigma)

(iv) Student t-test:-

T test is based on T Distribution and is considering an

appropriate test for judging the significance of a sample mean. It can also

be used for judging, the significance of the coefficients of simple and

partial correlations.

The relevant test statistic, is calculated from the sample data and

then compared with its problem value based on T distribution at a

specified level of significance for concerning degrees of freedom for

accepting or rejecting the Null Hypothesis.

10. SIGNIFICANCE OF THE STUDY: -

A) Contribution to the knowledge: -

Through this study my knowledge particularly regarding

various ratios will be improved.

Through this study my knowledge particularly regarding

various statistical tools and techniques and statistical tests is

improved.

My analytical power will be improved.

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B) Contribution to the society: -

Through this research society will be able to know the real

situation of the liquidity and profitability position, of selected

-

units, before and after merger and acquisition.

Through this study creditors and other parties can take proper
decision.

Employees will be able to take proper decision regarding job

(work).

C) Contribution to the Industry: -

Industry may be able to maintain their Liquidity and

Profitability position during post merger and acquisition.

Industry may be able to know the impact of mergers and

acquisitions on their financial performance.

11. OUTLINE OF CHAPTER PLAN:-

Chapter 1
Research Methodology:It covers the following aspects:

Introduction, title of the problem, Data collection, Sample

selection, Period of the study, Review of literature, Objective of the study,

Significance of the study, Hypothesis, Tools of analysis and Limitations of the

study.

Chapter 2
Conceptual Framework of Merger and Acquisition:
In this chapter

Introduction, Definition of merger and

acquisition, history of merger and acquisition, Types of merger, difference

between merger and acquisition, difference between acquisition and takeover,

Merger and Acquisition Process,

Significance of merger and acquisition,

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Requirement of merger and acquisition, Motives behind merger and acquisition,

Benefits of merger and acquisition, Limitations of merger, Impact of merger

and acquisition, Financial accounting for merger and acquisition, Merger and

acquisition strategies, Merger and acquisition laws, Merger and acquisition in

India, Merger and acquisition in world have been included.

Chapter 3
Brief profile of the Selected Industries
In this chapter the brief history of the selected 10 units, list of board of

directors, products and manufacturing process, organization structure of the

selected units, plants and its operations, production capacity of each unit, list of
associates and subsidiary companies, major achievements of the selected units,
corporate governance report and social responsibility, strength and weaknesses
and future plans of the selected units have been discussed.

Chapter 4
Analysis and Interpretation of Data
In this chapter analysis of profitability, liquidity and

leverage position of selected units under study have been explained. Here

meaning of profitability, liquidity and leverage, various measurement of

profitability, liquidity and leverage and framework of analysis of profitability

has been discussed. For analysis and interpretation of data the return on gross
capital employed ratio, return on net capital employed ratio, return on share

holders funds ratio, return on long-term funds ratio, Earning per share ratio,

gross profit ratio, net profit ratio and operating profit ratio for the profitability
analysis and current ratio, quick ratio, inventory turnover ratio, debtors ratio,

long-term debt to equity ratio, total debt to equity ratio, fixed assets turnover
ratio and working capital turnover ratio for the liquidity and leverage analysis

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have been calculated by the researcher. Here various ratios of profitability,

liquidity and leverage have been tested with the help of student paired t test.

Chapter 5
Summary, Finding and Suggestions
In this chapter summery of first five chapters, major findings and

suggestions of the present study have been shown.

12. LIMITATION OF THE STUDY:Every live and non live factor has its own limitations which

restrict the usability of that factor. The same rule applies to this research work.
The major limitations of this study are as under:

1. This study is mainly based on secondary data derived from the annual

reports of industry. The reliability and the finding are contingent upon
the data published in annual report.

2. There are many approaches for evaluation of Profitability and Liquidity.

There are no common views among experts.

3. The study is limited to five years before merger and five years after
merger only.

4. Accounting ratios have its own limitation, which also applied to the study.
5. Inflation plays vital role in Indian Economy. If we do not considered

inflation when analysis of financial condition, is studied, evaluation may

be not truly representative. In this study the effect of inflation is not
considered which becomes its limitation.

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6. This study is related with ten units. Any generalization for universal
application cannot be applied here.

7. Financial analysis do not repict those facts which cannot be expressed in

terms of money, for example efficiency of workers, reputation and

prestige of the management

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REFRENCES
1.

Ruberts N. Anthony : Management accounting principles

2.

S. P. Gupta Statistical Method

3.
4.

Iffinsis slerliy publishing.

Madhi J., Statistical method of an introductory text. New

age intentional P. Ltd.

Braverma J. D. Fundamental of business Statistical, New

Your academic 1997.

C. R. Kothari by Research methodology

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