Does Financial Performance Improve Post Cross Border Merger and Acquisitions?: A Detailed Study of Indian Acquirer Firms' Financial Performance Across Target Economy's Development Status and Financial Crisis

Abstract

The present study focuses upon the comparison between the pre and post merger financial performance of the Indian companies undertaking cross border mergers and acquisitions during 1998-2009. An attempt has been made to assess the performance on an aggregate basis, on the basis of timing of the acquisition – before crisis and during crisis and on the basis of the development status of the foreign targets’ economies. The results revealed a significant increase in size accompanied with a decrease in profitability, liquidity and solvency. This could be due to various reasons – industry specific factors, timing of the acquisition, status of the development of the target’s economy. The other reasons could be companies’ inexperience in foreign markets owing to lesser knowledge of handling cross border mergers and acquisitions as compared to western counterparts. A disaggregated analysis on the basis of timing of crisis reported a significantly lower growth in the size for the Indian companies acquiring during the time of US crisis as compared to those which did acquisitions before the crisis. These companies also accounted a significant deterioration of profitability, liquidity and solvency due to an increase in the operating costs and decline in demand. Although, valuation of the foreign companies especially those located in US and Europe during the time of crisis had reduced but for the operation of the merged firms expenses have to be made. However deals done in developed countries provided a significantly higher increase in the size than those done in developing countries owing to higher number of acquisitions in the former group. But the profitability, liquidity and solvency decline was higher in case of deals accomplished in developed countries. Our results suggest that the companies should diversify their portfolio of international exposure. Developing countries are emerging as new breed of consumers. Thus the focus of cross border mergers and acquisitions should be a balanced one considering the time as well as the location of the target.

Keywords: Cross border Mergers & Acquisitions, Financial Performance, India, Financial Crisis

JEL Classification: G34, M41, G01, F23