Table of Contents

Particulars

Page
Number

Introduction
Literature Review
Acquisition Motives
Rationale for Tata Steels Acquisition of Corus
Rationale for Hindalcos Acquisition of Novelis
Rationale for Suzlons Acquisition of REPower
Empirical Results
Announcement Date v/s. Execution Date
Analysis of Stock Movement: Announcement Date v/s.
Execution Date
Performance of Shares
Performance in the Short Term
Analysis: Performance of Shares in the Short Term (+,
- 30 Days)
Performance in the Long Term
Analysis: Performance of Shares in the Long Term (+, 5 years)
Summary of Operating Performance: Financial Ratios
Scoring system adopted to evaluate change in
financial ratios
Cumulative Impact of Key Financial Ratios
Analysis: Operating Performance of Acquiring Firms
Tata Steel: Key Observation
Hindalco: Key Observations
Suzlon Energy: Key Observations
Conclusion
References

3
4
6
8
9
11
12
13
14
15
16
17
17
18
19
19
20
21
22

1 | Page

List of Abbreviations
Abbreviation
CSN
D&B
MTPA
GoI
RBI
VSNL
Hindalco
Novelis
CARS
SEC
COGS
Suzlon
REpower
BWU
WTG
kW
MW
Hansen
AD
GBI
IPP
RoCE
RoNW
RoA
ROE
S&P
LME
ARFS
DSCR
CDR
M&A
M.D.

Full Form
Compahnia Sidderuggica Nacional
Distribution & Building
Million Tonnes per Annum
Government of India
Reserve Bank of India
Vidyut Sanchar Nigam Limited
Hindalco Industries Limited
Novelis Incorporation
Currency
Convertible
Alternative
Reference
Securities
Securities Exchange Commission
Cost of Goods Sold
Suzlon Energy Limited
REpower Systems AG
Brandenburgische Wind- und Umwelttechnologien
GmbH
Wind Turbine Generator
Kilowatt
Megawatt
Hansen Transmissions International NV
Accelerated Depreciation
Generation Based Incentives
Independent Power Producers
Return on Capital Employed
Return on Net Worth
Return on Assets
Return on Equity
Standard & Poor
London Metal Exchange
Anand Rathi Financial Services
Debt Service Coverage Ratio
Corporate Debt Restructuring
Mergers & Acquisitions
Managing Director

2 | Page

Introduction
The objective of my paper is to evaluate the effect of M&A on the operating
performance & shareholder value of acquiring firms.
While stock markets often react negatively to M&A, it is common for
managements of acquiring firms to claim that the M&A will benefit the
strategic interests of the Company in the long run. In order to test the
veracity of this strategic logic, part of my analysis is based on the
comparative analysis of the operating performance of acquiring firm for a
period of 5 years pre and post-acquisition.
For the purpose of my research, I selected three firms from India, Tata Steel,
Hindalco and Suzlon Energy which made cross-border acquisitions during
2007-08.
While Tata Steel was forced into a 5 year restructuring program worth
GBP400million which resulted in loss of upto 1500 employees & the firm was
downgraded to BB by Fitch after the acquisition of Corus, Hindalco had to
carry the burden of the loss making Novelis for a long time and Hindalco had
to seek refuge under goodwill impairment to write off the goodwill of
Novelis which is typically done when the recoverable value is smaller than
the carrying cost of assets.
Five years post acquisition, Suzlon was grappling under a debt pile of INR
13,017 crore and it could not utilize the cash in the balance sheet of REPower
due to restrictive laws of Germany. The Lenders were forced to restructure
INR 9,500 crore loan obligations from its balance sheet.
From my analysis, I do not find much evidence to support that M&A activities
improves the operating performance of the acquiring firm or leads to adding
to shareholder value.

3 | Page

Literature Review
While Indian firms are known to be involved in cross-border acquisitions of
industries such as pharmaceuticals & software development (Sun, S. L., Yan,
D, Ren, B., &. Peng, 2012), recent studies such as Duanmu & De Beule
(2012) provide that firms look to reduce costs while acquiring in emerging
economies & overcome trade barriers when they invest in developed
economies. Although there are numerous research papers on M&A in western
countries, there are very few researches that validate the proposed western
theories using empirical cases of Indian firms.
Ruback, Healy & Palepu (1997) studied the operating performance of fifty
merged firms in USA, on the basis of cash flows and discovered that these
firms experienced major improvements in their operating cash flows post
mergers leading to enhanced asset productivity. Doi & Ikeda (1983) found
that the ROE & ROA increased in half of the sample firms immediately after
merger & after the adjustment period, when the acquirers learn to
efficiently manage the acquired firm, ROA & ROE increase for more than half
the firms. Park, Suzuki & Kruse (2003) researched on a sample of 56
Japanese manufacturing firms & studied the operating performance of these
firms from 1966 to 1997. It was revealed through this research that operating
performance of these firms improved over a period of 5 years.
However, Ghosh (2001) compared the operating cash flows during pre and
post-acquisition periods of merging companies and did not find any proof to
substantiate that the M&As are instrumental to grow the operating cash
flows post acquisitions. Ghosh (2001) also argued that cash flows do not rise
for acquiring firms that use stock to merge instead of cash. This is
4 | Page

predominantly drawn from the fact that the firms acquiring by cash exhibit
superior pre-acquisition performance which help in better operating cash
flow performance post acquisition as well. Further, it was also observed by
various studies (Fishman, 1989, Ryngaert & Brown, 1991, and Majluf &
Myers, 1984) that improved post-acquisition performance is more linked to
better sales growth than reduction in costs. Mansingka & Weston (1971)
researched on the impact of M&As on the performance of conglomerate firms
vis--vis the firm itself & found that the difference was inconsequential over
a the long run. Renneboog, OOsting, & Marina (2007) worked on the
acquisitions made in Europe & their effect on the economic performance and
concluded that the profitability of both the acquiring & acquired company
decreased after the M&A.
In addition to the argument proposed by Lyon & Barber (1996), the practice
of researchers using industry-median companies as benchmark to compare
performance of firms around particular events have been criticized by
Shivdasani & Kang (1997) and (Daley et al., 1997) as they argue that such a
benchmark will most probably lead to biased conclusions when the size &
performance of the firms differs between the industry median firms and the
sample prior to the event. Following these suggestions, I have not to
compare the performance of the acquiring firms with an industry median, but
to compare the financial performance of the firm pre and post-acquisition
(over a period of time).
Therefore, various researchers have uncovered mixed results on the subject
of difference of financial performance of acquiring firms pre & postacquisition. I endeavor to exhibit my findings on the subject through this
study by using Asian examples.

5 | Page

Acquisition Motives
In addition to the liberalization of policies towards overseas investments in
2000 by the GoI, the RBI had increased the limit of Indian
companies wishing to invest overseas from 100% of the
net worth of the Indian firm to 200% during 2005.

Deal
Financing**

Additionally, it was also announced that it would be

As there was

possible to further enhance the limit of overseas

reasonably low

investment in deserving cases & several other rules

debt (US$2.4 bn.

pertaining to cross-border investments were simplified.

These policies encouraged many Indian firms (especially
conglomerates)

to

actively

consider

overseas

investments as an option to acquit themselves as global

against equity of
US$6.8bn.) on the
balance sheet of
Corus, Tata Steel
was able to

players.

borrow

Rationale for Tata Steels Acquisition of

US$6.26bn. on the

Corus

balance sheet of
Corus.

Amongst the worlds most geographically branched out

Although Tata

producers of steel today, Tata Steel operates in 26

Steel Asia

countries, has presence in more than 50 nations and

Holdings Pte. Ltd.

employs 80,000 employees in 5 continents. On 2 nd April

and Tulip UK

2007, Tata Steel acquired 100% stake in Corus at 608

Holdings (No. 1)
Ltd. had drawn
approx.

6 | Page
US$3.85bn. of
bridge loans at

pence per share (Guardian, 2007)

amounting to

US$12.04 billion (seven times the EBITDA forecast of

2006) surpassing CSNs bid of 603 pence per share. Tata
Steel had earlier acquired Singapore based Natsteel Ltd.
and Thailand based Millennium Steel in during February
& December 2005 respectively.

The Tata Group already had extensive experience in

domestic & cross-border acquisitions prior to this deal
such as the acquisition of Tetley for $407million in
2002,
Natsteel1999,
($486
million) Hoogovens
in 2004, N.V.
VSNLs
On
6th October
Koninklijke
and
acquisition
basedto Teleglobe
for At
$239million,
British
Steel of
Plc.U.S.
merged
form Corus.
the time of
U.S.
based Eight
O Clock
and21.2
Glaceau
$220
the
acquisition,
Corus
couldCoffee
produce
MTPAfor
steel
and
million
$677ninth-largest
million respectively
in 2006.
(Forbes,
was
the and
worlds
producer
of steel
in the
world (Annual Report of Corus, 2006) while Tata Steel
was producing only 8.1 MTPA of steel, including 4.4 MTPA
at the plant in India, Nat Steels plants produced 2 MTPA
and 1.7 MTPA at the plant of Millennium Steel. (Tata
Steel, Annual Report 2006) during that time. Corus
comprised of four divisions long products, strip products,
D&B systems and Aluminum.
While Tata Steel was manufacturing long & flat steel
products which were typically low value, high value
stripped products were produced by Corus thereby
creating a natural synergy between the two firms. Corus
also owns a strong R&D unit with several patents to its
credit which would facilitate cross fertilization of the R&D
initiatives of both the firms and catalyze exchange in
7 | Page

As on March 31,
2008, the equity
capital infused by

technology. (Chairmans Speech, Tata Steel Annual

Report 2007).
Although

in

Tata Steel
(including
preference shares

terms

of

shipments,

Corus

was

& warrants is US$

approximately four times the size of Tata Steel, the

7.45bn.

operating profit achieved by Tata Steel in 2006 on sales

The end use of

of 5.3 MTPA of steel was USD 1.38 billion* while Corus

Deal
the non-recourse
Financing

achieved operating profit of only USD 797.02 million* on

borrowed funds
With long term &
(syndicated for
short term debts
Tata Steel UK)
of US$2.29bn.*
included
against
upgradation of
shareholders
iron making
equity of just
facilities &
$0.19bn.*, a
installation of new
leveraged buyout
facilities like thin
like the case of
slab casting, steel
Tata-Corus deal
making shop,
was not possible
rolling mills and
in this case.
palletizing plants
The
deal was
(capacity:
6 MTPA)

sale of 18.6 MTPA of steel in the same year. This

highlights the exponentially superior levels of operating
efficiency of Tata Steel as compared to Corus and the
value that can be added to Corus by measures such as
procuring significantly cheaper raw material from the
iron ore mines owned by Tata Steel in India.
*Figures converted to USD at retrospective exchange
rate as on March, 2006
**Figures extracted from the Tata Steel Annual Report,
2008 & converted to USD at retrospective exchange
rate.

financed
byto
debt
in addition
of US$3.03bn.
from a consortium

Rationale for Hindalcos Acquisition of

Novelis

of lenders and
Noveliss existing
bank loans of

The Georgia based Novelis which (a spin-off of the

US$1.2bn. was

Canadian Alcan Inc.) was leading producer of aluminium

refinanced by

rolled products in the world with shipments of 2,960 kt.

in 2006 (Novelis, Annual Report-2006). On 15 th May,
2007 the firm was acquired by Hindalco (flagship metal
company of the Aditya Birla Group which was the largest

fresh term loans.

Noveliss notes of
US$1.4bn.
continued to exist.
Hindalcos
treasury
operations8 | P a g e
arranged US$ 450
million of equity.

producer of aluminium domestically in India) for a

consideration of USD 44.93/share amounting to USD 6.2
billion (which was 16.6% higher than the closing price of
the stock on February 9, 2007).
While

Hindalco

produced

only

211,088

tonnes

of

of Hindalco which

aluminium in 2006, Novelis had produced 211,088

was to be repaid by

tonnes in that year. Also, the global market share of

10th Nov, 2008.

Novelis was 19% (Hindalco Annual Report, 2007) in the

Accordingly,
interest costs rose

The valuation offered by Hindalco translates into an

Enterprise Value/EBITDA multiple of 38.99 and Market

from INR 314cr. in

2007 to INR 1849cr.

Cap/PBT multiple of 36 based on the 2007 year end

results forecasted by Novelis. Earlier in March 2006,
Aleris had acquired Coruss aluminium rolled product
venture at a Market Cap/PBT multiple of just 18. This
proves the bullish levels of bidding made by Hindalco
aluminium can recycling segment with sophisticated
technology that Hindalco would have otherwise required
over 10 years to build. (Kumar Mangalam Birla, 2007).
Novelis employed 12,500 employees across 11 nations
and reported sales of US$9.9bn in 2006. Hindalco would
have access to reputed customers like Coca Cola, Ford,
Kodak, General Motors, etc. by taking over Novelis. A
predominantly upstream player, Hindalco would be able
to add downstream operations after acquisition of
Novelis. However, the COGS of Novelis was extremely
high (94.6% of sales) and the firm was tied with some
fixed-price contracts without an escalation clause
which caused the company net loss of US$275 million in
2006. These agreements were however, expected to
expire shortly.

9 | Page

* Figures extracted from Form 10-K (Annual Report) as

reported by Novelis on March 1, 2007
** Figures extracted from the Annual Report of Hindalco, 2008

Rationale for Suzlons Acquisition of

REPower
REpower was formed in 2001 by the merger of BWU,
Jacobs Energie & Energiesysteme (German suppliers of
wind turbines), functioned in the area of wind power and
had installed 1,250MW during 2008 (Annual Report,
Suzlon, 2008). While the market was predominantly
dominated by 750kW class WTGs, REpower introduced

Deal Financing
The acquisition was
predominantly
financed by debt.
On 9th Feb, 2007,
Suzlon & its
subsidiaries
entered into a

the technologically sophisticated 1.5MW MD70/77 series

credit agreement

of WTGs which was stellar performer and followed it up

with ABN AMRO

with production of 2MW WTGs with rotor diameters of

Bank for an

upto 92.5metres. In its quest to be the market leader in

acquisition finance

offshore WTGs, Repower assembled a prototype of a

facility of US$

5MW 5M offshore WTG in 2004 at Brunsbuttel, Germany

800million. Secured

which was commissioned in the open sea by 2006.

(REPower Annual Report, 2006) With rated output of
6.15 MW and rotor diameter of 126.5 metres, this was
termed as a masterpiece by many and attracted

debt of US$745
million was
arranged against
pledge of shares of
REpower &

immediate attention from companies like Suzlon &

corporate

AREVA as the offshore market was expected to grow to

guarantee of

8,155MW by 2012 (Annual Report of Suzlon, 2008).

Suzlon.

During 2007, Suzlon had 58% market share in the

Suzlon also issued

8000MW wind power capacity of India (Annual Report of

zero-coupon

Suzlon, 2008). Based out of Pune, Suzlon was the fifth

largest in the world in terms of installations made
annually (BTM Consult ApS - World Market Update) in

10 | P a g e

2007 and had installed huge capacities (3294MW) in

The secured loans

USA, China, Australia, EU, Australia & South America.

of Suzlon increased

The range of products offered by Suzlon included

from US$ 3.17

medium capacity WTGs for the on-shore market, but it

billion* in FY 2006-

had long been aspiring to introduce off-shore class of

07 to US$ 11.29

WTGs, and that is where a natural synergy was available

billion* in 2007-08

with Repower.

due the
acquisitions of

Along with gaining expertise in off-shore capabilities,

Hansen and

the acquisition of REPower would also complement the

Repower.

supply

Suzlons

chain

strategies,

product

portfolio

and

geographical presence of Suzlon. On June 21, 2007,

investments

Suzlon acquired 33.6% stake in REPower for US$ 1.75

increased from

billion* which was gradually stepped up to 66% in 2008,

US$2.5 million* in

92% in 2009 and 100% in 2012.

FY 2006-07 to US$

However, the acquisition was not appreciated by all

experts. (Eize de Vries, 2007). Many believed that the

501.8 million* in
2007-08 due the

valuation offered by Suzlon for the acquisition was too

high. Suzlon itself was a young company (just 13 years
old) at that point of time and many questioned the
maturity levels of the firm to handle a cross-border
Earlier in March 2006, Suzlon had acquired Belgium based Hansen for
business of this nature.
US$565 million to control the supply of wind turbine gearboxes. This
acquisition was financed by a consortium of Banks and added to the debt pile
of Suzlon. Unfortunately for Suzlon, they had to sell their stake in both based
Hansen and REPower in the subsequent years due to heavy debts. REPower
was later renamed to Senvion and sold at a distress valuation of US$1.09bn.

*Approximate figures extracted from the Annual Report of Suzlon (2007-08)

11 | P a g e

Empirical Results
Announcement Date v/s. Execution Date
Tata Steel
Share Price

Share Volume

520

3000000
2500000
2000000
1500000
1000000
500000
0

500
480
460
440
420
400
380

Announcement Date
-7

-1

Execution Date
1

-7

-1

Hindalco

Share Volume

Share Price
2000000
1500000
1000000
500000
0

200
150
100
50
0

Announcement Date
-7

-1

Execution Date
1

-7

-1

Suzlon Energy

12 | P a g e

Share Volume

Share Price
3000000
2500000
2000000
1500000
1000000
500000
0

2000
1500
Share Price (INR)

1000
500
0
Announcement Date
Timeline (Days)

-7

-1

-7

-1

Analysis of Stock Movement: Announcement Date v/s.

Execution Date
While the share price of Suzlon was marginally lower on the announcement
date as compared to the execution date, a backward trend is observed in
case of Tata Steel and Hindalco. Further, Suzlon recorded a whopping 18.9%
rise in its share price at BSE on the execution date which reflected the bullish
sentiment of the market. Analysts were bullish on the REpower acquisition by
Suzlon (Forbes, 2007) and predicted a neutral ROE by 2009.
In case of Tata Steels acquisition of Corus, stock market reacted negatively
to the expensive deal. While neutral view of the stock investors continued
from the announcement date till the October 18, 2006 when Coruss board
approved the acquisition. However, as the cost of the deal started rising (see
appendix), shareholders started behaving negatively & the stock plummeted
by 6.4% on December 11, 2006 on the news of Tata Steel raising its bid to
$9.2 billion. In reaction to Tata Steels final bid of 608p / share, on January
31, 2007, the stock price further fell by 10.5% due to the investors
skepticism about the piling debt levels for the deal which was now worth $12
billion.
Similarly, and the market capitalization of Hindalco tanked by over INR 2,700
crores and there

was a rush to offload shares as within two days,

13 | P a g e

shareholders had dumped approximately 7.3 million shares since Hindalco

announced the price for acquisition on February 11, 2007. The valuation
premium paid by Hindalco for Novelis rose to 49.1% on January 25, 2007
from 16.61% on the date of announcement causing share prices to dip by
13.7%. By the close of next trading day the share price of Hindalco was lower
than the Sensex by approximately 15%. Hindalcos Chairman made a
statement urging the shareholders to remain patient and see the bigger
picture.
A similar trend was witnessed in the case of share volume movements where
Suzlons stock volume rose a whopping 1252% on the execution date as
compared to the announcement date. The same is not true for Tata Steel &
Hindalco as the share volume dropped 73% and 95% on the execution date
as compared to the announcement date for the two firms respectively.

Performance of Shares
Performance in the Short Term

(Note: Day

0 is the acquisition date)

Share Volume

Share Price

4000000

3000
2000
Average Share Price 1000
0

NUmber of Shares

2000000

Timeline (Days)
Tata Steel
Suzlon

Share Price

Hindalco

Timeline (Days)
Tata Steel

Hindalco

Suzlon

Share Volume

14 | P a g e

Total Turnover (Share Price x Volume of Shares)

Number of Trades

3000000000

60000

2000000000

40000

Total Turnover (S hare Price x Volume of S hares )

1000000000

Number of Trades 20000

0

0
-30

Timeline (Days)
Tata Steel

Hindalco

Suzlon

Timeline (Days)
Tata Steel

Hindalco

Suzlon

Total Turnover

Number of Trades

Spread (High - Low)

Spread (Close - Open)

50

150
100
Spread (High - Low) 50
0

Spread (Close - Open)

0
-50
-100

Timeline (Days)
Tata Steel

Hindalco

Suzlon

Spread (High - Low)

Timeline (Days)
Tata Steel

Hindalco

Suzlon

Spread (Close - Open)

Analysis: Performance of Shares in the Short Term (+, - 30

Days)
There was growing concern over both the Corus & Novelis acquisitions as
Corus was 3 times the size of Tata Steel (in terms of capacity) and Novelis
made a loss of $275 million in 2006. While Corus was considered to be a
drag on the balance sheet of Tata Steel (International Herald Tribune, 2007),
analysts felt the Birlas were paying too much for Novelis that was caught in
some fixed-price contracts without an escalation clause which caused the
company net losses in 2006.

15 | P a g e

Amidst growing concerns of Tata having overpaid for Corus and debt
liabilities due to the acquisition (International Herald Tribune, 2007), the
average share price of Tata Steel dropped to INR 434 on the date of
acquisition further falling to INR 429 on the next day.
In case of Suzlons acquisition of Repower, when Suzlon submitted the bid,
the immediate reaction of the market was negative. However, with the
transaction fructifying in an amicable way for a valuation of $1.8 billion
(which was agreed to be paid over a period of time in installments) the
market reacted positively with the share price rising over the 30 day
timeline.
The initial hysteria around acquisition can be observed from the steep rise in
share volume and number of trades of all the three stocks in the first 7 days
post acquisition. While stock volumes of all three firms show an upward trend
after the M&A has just completed, we observe a decrease in the stock
volume over a period of time.
Further, the high spreads (close-open) of Suzlons shares during the
acquisition week shows the active intra-day movement of the shares and
may indicate towards weak correlation between the trading activities & the
fundamentals of the company itself.

Performance in the Long Term

(Note: Day

0 is the acquisition year)

16 | P a g e

Share Price Movement

2000.0
1500.0

Average Share Price

1000.0
500.0
0.0

Timeline (Years)
Tata Steel

Hindalco

Suzlon

Share Volume Movement

4000000000.0
3000000000.0

Number of Shares

2000000000.0
1000000000.0
0.0

Timeline (Years)
Tata Steel

Hindalco

Suzlon

Share Price Movement

Share Volume Movement

17 | P a g e

EV/EBITDA Multiple
15.0
10.0
5.0

EV/EBITDA Multiple

0.0
-5.0
-10.0

Timeline (Years)
Tata Steel

Hindalco

Suzlon

EV/EBIT Multiple
80.0

60.0

40.0

20.0

EV/EBITDA Multiple

0.0
-5

-4

-3

-2

-1

-20.0

-40.0

-60.0

-80.0

Timeline (Years)
Tata Steel

Hindalco

Suzlon

18 | P a g e

EV/EBITDA Multiple

EV/EBIT Multiple

Analysis: Performance of Shares in the Long Term (+, - 5

years)

While the stock prices continued to drop for all three firms (biggest
drop in Suzlons stock) in the first year after acquisition, Tata Steel &
Hindalco seem to have recovered over a period of time while Suzlon

continued its free fall.

Corus was acquired by Tata Steel at the cost of 9 times its EBITDA
while in the same year Arcelor was acquired by Mittal Steel for 6 times

EBITDA Multiple
Considering lack of exposure to cross-border acquisitions by Indian
companies, Crisil declared a rating watch with negative insinuations on

Tata Steel.
B. Muthuraman (M.D., Tata Steel) was quoted saying that the
acquisition price implies that the value of steel-making capacity at
Corus is US$710/ton, which is much cheaper than installing a
greenfield capacity which would cost upto $1300 per ton (Bloomberg,

2007).
However, as per ARFS (2010), the valuation of the capacity at Corus is
approximately $360-400/ton, which is slightly higher than half of what
Tata Steel paid in 2007-08.

19 | P a g e

The shares of Hindalco had underperformed Sensex by 26% even one

year after the announcement.

The reason for the sudden drop in stock price of Suzlon in 2008
(acquisition year) may not be completely attributed to the acquisition
as the Company had announced a stock split in 2008 (January). The
sudden rise in stock volume of Suzlon can also be attributed to the
stock split which reduced the price of the stock making it more

affordable for investors to buy.

At the time of acquisition of Repower in 2006, the material cost of
Suzlon was 60.3% while the material cost of Repower was 83.6%.
Therefore, analysts reasoned that Repower could benefit tremendously
if Suzlon can integrate its Indian & Chinese operations to bring down
the material cost for REpower significantly.

Summary of Operating Performance: An approach using

Financial Ratios
In order to summarize the exhaustive financial ratios, that were calculated to
evaluate the pre and post-acquisition operating performance of acquiring
firms, the following steps have been adopted:

20 | P a g e

Step 1: The mean of each ratio for all the three acquiring firms
were calculated and tabulated (available in appendix)

Step 2: The means of 1 year pre and post-acquisition and 5 years

pre and post-acquisition (Year 0 being the acquisition year) were
compared with each other and scores of either +1 or -1 were
awarded to the same (based on my understanding of the financial
ratio)
For instance, if the mean Net Profit Margin of the three firms has
reduced from 11.8% in Year -5 and -8.8% in Year +5, then a score
of -1 is awarded to this ratio.

Step 3: The cumulative scores of these ratios indicate the

cumulative impact of the acquisition on the overall operating
performance of the firm. If the cumulative score of the scored ratios
is positive, then there is a positive impact of the acquisition on the
operating performance of the acquiring firm and if the cumulative
score of the scored ratios is negative, then there is a negative
impact of the acquisition on the operating performance of the
acquiring firm.

Scoring system adopted to evaluate change in each

financial ratio:
Financial Ratios
Positive change in financial ratio
Negative change in financial
ratio

Score

Score
+1

+1

-1

-1

Cumulative Impact of all Major Financial Ratios

Financial Ratios
Earnings per Share

Comparing +, - 1
year
-1

Comparing +, - 5
years
-1
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Price/Earning Ratio
Dividend per Share
Gross Profit Margin (%)
Net Profit Margin (%)
Return On Capital Employed
(%)
Return on Net Worth (%)
Return on Assets
Current Ratio
Quick Ratio
Debt Equity Ratio
Interest Coverage Ratio
Inventory Turnover Ratio
Debtors Turnover Ratio
Fixed Assets Turnover Ratio
Number of Days In Working
Capital
Material Cost Composition
Dividend Payout Ratio Net
Profit
Cash Earning Retention Ratio
Cumulative Score

-1
-1
-1
-1

1
-1
-1
-1

-1

-1

-1
-1
-1
-1
-1
-1
1
-1
1

-1
-1
-1
-1
-1
-1
-1
1
-1

-1

-1

-1

1
-9

-1
-13

As can be observed from the above table, the financial ratios indicate that
the financial health of the acquiring firms have only been deteriorating post
the acquisition and contrary to the findings of Doi & Ikeda (1983), the levels
of operating performance of acquiring firms continue to reduce even in the
long run (unless the adjustment period defined as the time taken by the
acquirer to learn to efficiently manage the acquired firm by Doi & Ikeda
(1983) is more than the time period of 5 years considered in my analysis.
Note: A graphical representation of the financial ratios has been captured in
the appendix.

22 | P a g e

Analysis: Operating Performance of Acquiring Firms

Tata Steel: Key Observations

Soon after Tata Steel acquired Corus, the division producing long
products at Corus was struggling due to low demand of the
construction & infrastructure sector. (The Wall Street Journal, 2011).
Because of lack in demand, Tata Steel was forced to embark on a 5
year restructuring programme worth GBP400million which resulted in

loss of upto 1500 employees.

Further, many factors such as the termination of the Teesside Offtake
Agreement in Europe and the lower demand of long products in Europe
& Thailand added to lower profitability of Tata Steel. (Tata Steel Annual

Report, 2009-10).
While Tata Steel is 100% & 50% backward integrated in terms of its
iron ore & coking coal requirements respectively, Corus is entirely

unprotected to raw material price volatility.

While Tata Steel had stated offloading low cost slabs to Corus as a
synergistic strategy, there was no spare slab capacity it could offer in

2006.
While Tata Steels strengths were capacity utilization & low labor costs,

Corus had strong unions, high labor costs & excess capacity.
While Tata Steel is today rated in the BB family by most of the reputed
Credit rating agencies, the firm used to be rated BBB- (S&P) which was
two notches above Indias sovereign rating prior to the acquisition of
Corus.

Hindalco: Key Observations

Similar dip in demand in the US & Eurpean market for flat rolled
products & decrease in average LME price caused Hindalcos sales to
fall from INR19,118 crores in FY2007-08 to INR18,334 crores in 200809 (Annual Report of Hindalco, 2009).

23 | P a g e

The acquisition year of 2007-08 witnessed the deterioration of key

value drivers at Hindalco such as stronger rupee, increase in input
costs due to spike in crude prices, lower LME, etc. However, positives
such as Hirakud expansion led to additional production of 35% as

compared to 2007 helped to contain a fall in EBIT.

Due to the fixed price contracts carried by Novelis, the firm declared
$472 million unrealized losses for derivatives that were used to hedge

foreign currency & commodities exposure.

The sudden increase in debt from US$1.94 billion in 2007 to US$8.09
billion in 2008 (Hindalco Novelis-Analyst Presentation, 2008) caused
the DSCR of Hindalco to drop from 15 times in 2007 to 3 times in 2008.

Suzlon Energy: Key Observations

Suzlon could never access the technology of REPower until it

purchased the stake from all minority shareholders in 2012.

Although Suzlon was reeling under a mountain of debt of INR 13,017
crore, it could not utilize the cash in the balance sheet of REPower due
to prohibitive German laws. Suzlon soon found itself in a CDR
programme in June, 2012 when the lenders were forced to restructure

INR 9,500 crore loan obligations from its balance sheet.

The recall of AD & GBI benefits in India during 2013 reduced the
incentives offered to the IIPs in India which led to slower growth in wind
capacity & had a catastrophic impact on the sales of Suzlon. (Suzlon

Annual Report, 2012-13)

Suzlon witnessed an unprecedented spike in COGS during FY2012-13
due to inventory mismatches, provisions made because of bad
accounts, idle crane time caused by slower execution, etc. (Annual

Report of Suzlon, 2013)

Suzlon finally renamed REPower to Senvion & sold it to Centerbridge
Partners, LP (a PE Fund that buys distressed assets) at a consideration
of INR 7500 crores whereas it has purchased the same at INR 10,000
crores.

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The findings from our sample is in accordance to that of Ryngaert & Brown
(1991), Fishman (1989) and Majluf & Myers (1984) which highlight although
sales growth is observed in the acquiring firm after acquisition, cost
reductions are not a reality which contradicts with the very purpose of
acquisition as suggested by Duanmu & De Beule (2012).

Conclusion
By comparing the pre and post-acquisition financial positions of the selection
of acquiring firms, there is very little evidence to support that the operating
performance of the acquiring firms have improved following acquisitions. The
possible limitations of my research are that all the chosen acquisitions were
cash transactions & hence we cannot form any view on stock acquisitions,
the firms operate in different industries, size, etc., and these examples are
limited to cross-border acquisitions only. It may therefore be concluded that
firms need to identify economic rationale and not get carried away by ego
and emotion (Malvinder Singh - CEO, Ranbaxy) in case of cross-border
acquisitions. True to his own advice, Mr. Singh offloaded his entire stake in
Ranbaxy to a Japanese drug producer (Daiichi Sankyo) and eminent business
tycoons from India such as Anand Mahindra (Chairman, Mahindra &
Mahindra) said he felt regret that Japan will now control the Indian MNC.
Within a year, the share price of Ranbaxy plummeted by 70% coercing
Daiichi to write-down the value of Ranbaxy by $3.6 billion.
In conclusion, the causes for underperformance observed in the selected
firms may be directly linked to agency problems, easy capital (as the firms
would not be under the debt piles had the funding institutions evaluated the
debt servicing capabilities post-acquisition more carefully) and difficulty in
achieving true integration in cross-border mergers & acquisitions.

25 | P a g e

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