india going global.indd - The IIPM Think Tank

MERGERS & ACQUISITIONS
ing, rather than information. The study contradicts the
premise that stock prices solely reflect value changes. It
clearly questions the event study’s ability to distinguish
the real economic gains from market inefficiency. Finally,
value can be said to have been created if one can establish
unequivocal evidence of creation of efficiency and its
causes. Since event study approach cannot perform this
task, there is need to examine how input output relations
transform as a result of M&A activity. More so in case
of emerging economies which are undergoing a process
of fast transformation and which often are characterized
by absence of efficient markets.
The Present Study:
Accordingly, the present study aims at examining the economic
gains of M&A activities by investigating whether
mergers result in economies of scale and technological
change. Understanding these issues is critically important
both to understand the economic rationale behind the
corporate decision maker’s action and to gauge whether
M&A activity really leads to improvement in internal
management and creation of synergy. It is obvious that if
operating efficiency improves it must lead to emergence
of economies. Since M&A represent structural changes
in the firm and invariably a change in the scale of operations,
the impact of mergers from the point of view
of change in the scale needs to be properly scrutinized.
Secondly, technological performance is strictly related
to commercial and economic success (Franko, 1989) and
represents one of the most important long term effects
of acquisition. Unfortunately such long term effects of
M&A tend to be underestimated (King et al, 2004).
The present study attempts to examine the issue of
efficiency by providing a detailed study of cost and technological
structure of merged firms on one hand and
structural shift in the profitability of the operations on
the other, based on a large panel data extending over one
decade. The study will serve three major purposes:
1. Fill the void in the literature by (a) examining structural
shift in the profitability of merging firms and (2)
by examining the economies of scale as manifestation of
efficiency by studying the underlying characteristics of
production process represented in the cost structure.
2. The study evaluates whether there is any technological
change post M&A. Such a change is likely to act as a
powerful proxy for the existence of synergy.
3. The study employs panel data across three emerging
economies namely India, Brazil and Malaysia and makes
an attempt to study the influence of changing global
environment brought about by progressive movement
towards integration of distant economies of the world.
Method:
To investigate whether the time of merger or acquisition
in the life history of a firm represents the point of
structural shift the present study uses structural shift
model. Following the parametric approach of studying
the characteristics of production process from structured
production functions which represent of the underlying
technical relations between input and output the present
study employs cost function to investigate whether scale
of economies and technological change occur as a result
of M & A ; latter being the indicator of improvement
in internal management .The cost function is also used
to examine other relevant properties of the production
process.
Structural Shift Model:
If M&A is successful one expects, as stated above, improvement
in performance. Following DU- Pont analysis,
efficiency and leverage manifest in return on equity
(ROE). A successful merger must therefore demonstrate
a structural shift in profitability from the point of view
of owners, after the merger. Whether structural break
has taken place at the point of merger can be statistically
measured by regressing time variable (causal variable)
on ROE (dependent variable) time series. It is well
established in econometric literature that to arrive at
reliable results from a time series, it is necessary to study
whether it is stationary. If a time series is stationary, its
mean, variance and auto covariance (at various lags) remain
the same no matter at what time we measure them
(Cuthbertson, Hall and Taylor, 1995). Such a time series
will have mean reversion process. The series will tend
to revert to its mean and fluctuations around this mean
July-October - 2007 Need the Dough
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