Abstract
There is a story about a young girl below 10 years of age, getting her hand put into a cast, due to a fracture, asking the doctor, ‘Doctor, once the cast is removed, will I be able to play the piano?’ The doctor, wanting to assure her that her hand will be back to normal once the cast is removed, told her, ‘Of course you will.’ The girl was very happy and said, ‘That is great doctor, as I was not able to play the piano before I fractured the hand.’
The liberalization of the Indian industry through the economic reforms and the new industrial policies implemented by the Government of India in the early 1990s had the same effect on the Indian industry as the ‘removal of the cast’ in which the industry was earlier bound under many constraints. It is to the credit of the Indian industry, which was constrained in the pre–1990s from expansion, consolidation, and gaining economies of scale in many industries to become competitive in the world market—they learnt to ‘play the piano’ even though they had not done it in the years before.
This book by P L Beena, an academician and research scholar, looks at the classical economic advantages that should accrue in the theoretical framework of mergers and acquisitions (M&A), to see if the flurry of activities in the Indian market between 1990 and 2010 in the M&A space follows and justifies the theoretical postulates of the M&A activity propounded in different researches of the past, both with respect to India and the rest of the world.
The author embarks on a journey through the book to provide a comprehensive data and analysis based picture of the M&A in the two decades, from 1990 to 2010, in India as well as the cross-border M&A that Indian companies have undertaken. The effort has been to understand the motives, structure, and implications of the M&A in selected manufacturing industries in India to see the emerging trend.
The major driving factors for the increased M&A activity in the Indian scenario were the macro-economic changes that were perhaps the result of the bankruptcy looming on the horizon at the beginning of the 1990s. These not only removed many of the fetters that constrained the manufacturing units in India from becoming economically efficient, but also prevented them from being globally competitive.
Hence to a large extent, many of the local M&A were driven more by a desire to become competitive in the country as compared to the multinational corporations entering the country through an acquisition route. The real prices (inflation adjusted) of almost all the manufactured products coming down during this period, and resulting in increased standards of living of the consumers, is sufficient evidence that these M&A did not result in the concentration of economic power or monopoly.
A majority of acquiring firms went through a period of rise in share prices prior to merger and then experienced a fall in share prices on the announcement of the merger that extended to even two years beyond the merger (Tables 5.7–5.10). However, this cannot necessarily be used to draw the ‘voluntarist’ explanation that the share prices in these firms could have been engineered. Share prices, and hence shareholder wealth, is based on performance expectations and sentiments, rather than being directly variable with specific indices. Often the acquiring company’s share prices before an acquisition reflect the market expectations of the post-merger performance and the positive sentiments that reflect in higher prices than the immediate performance indices indicate. However, most mergers are planned on the basis of long-term wealth creation rather than the immediate post-merger wealth creation, due to the considerable amount of one-time costs that have to be incurred in restructuring the operations. This then shows up as a dampener on the pre-merger sentiments of the acquiring firm and hence the wealth increase for the shareholders takes a hit.
Another conclusion the book draws is that the rate of return and profit margins of the M&A intensive industries was quite high compared to the average ratio of the manufacturing sector. However, this was not passed on to the employees as there was a continuous declining trend in the wage share of the acquiring firms as well as of the merger intensive industries. The first part of this conclusion is axiomatic, as that is one of the most important objectives of undertaking either a merger or an acquisition. But the second part of the conclusion is, I believe, due to the misinterpretation of the numbers, based only on the share of the wages in either the overall costs or revenue. In the case of a merger or an acquisition, a considerable amount of restructuring is required in one or often both the companies as a number of duplicated jobs will become redundant. This is taken care of through the one-time, non-recurring restructuring costs of compensation paid to the employees who become redundant. However, the continuing employees often get a bigger increase than if the company did not go through a merger or acquisition. Moreover, in a merger or an acquisition, the top line often increases substantially and that increase is often at a higher level than the increase in wages to the employees.
Some M&A in India during this period were the result of M&A activities taking place between the parent companies outside India, such as the Glaxo Wellcome-SmithKline Beecham merger in 2000 or Pfizer acquiring Wyeth in 2009. These however do not find a place in this book. Some of these overseas M&As resulted in job losses in India due to their Indian subsidiaries also consolidating their operations, resulting in an economic repercussion.
Statistics as presented in Appendix 4.5 shows that the share of horizontal M&A accounted for nearly 58 per cent and the vertical M&A accounted for 35 per cent of the total, highlighting that most M&A were to increase capacity and market share to become more efficient and competitive in the Indian and global markets.
After sifting through the mass of data and trying to interpret the same in terms of a general theory of M&A, the evidence goes to substantiate that the motives and consequences of mergers are specific to time, space, policy regime, and industry and even to the individual firms.
While the book in general is directed towards the academic and research community, it is a good basis for all students and practitioners of management, especially in today’s context of many start-ups coming up in the manufacturing, service, and financial sectors and the consequent M&A that continue to take place, to become competitive. A reading of the book will give the various reasons for M&A and also apprise the reader about how many units have benefited and how many have fallen short of expectations.
One area which the book does not go into in its analysis is the quality of management of the acquiring companies, to be able to manage the acquisition to get the full benefit of the merger. Though the ultimate result will always depend on the quality of the management, there is no easy way of quantifying that in a research study of this nature.