Growing through M&A: Impact Analysis of Acquisitions in IT Industry.

AuthorMathur, Mayank
PositionMergers and acquisitions


Enterprises normally grow through internal or external expansions. The internal or organic expansions deal with growing either vertically in a sector to improve on the market capture, or horizontally in related or even unrelated sectors, to tap the untapped sectors and grow the overall revenues. The external or inorganic expansions are mainly related to combinations of the corporate and businesses. This could be achieved by an integration between the two (or more) businesses to come out with a newer proposition in the market (mergers) or by simply acquiring a business and running under the same umbrella as other businesses (acquisitions).

The business decision on expansion either way lies in the overall vision and strategy of the businesses. Many times it all comes to a decision point whether to "make" a product or a solution internally versus "buy" the same from the market. Apart from the ongoing business strategies of the organization, there are decisions which should be based on a pure "return on investment" basis. An analysis including the trend analysis, forecasting etc. of these strategic moves play a key role in the decision making.

Literature Review

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, the investment bankers across the globe arrange M&A transactions, which bring separate companies together to form larger ones. There are several studies on this area, discussing about various theories. Baldwin and Caves (1990)examined trends in added value per worker between 1970 and 1979 in the Canadian and US corporations that had been the object of mergers or acquisitions during that period. They concluded that changes in control were followed by improvements in productivity. Tarasofsky and Corvari (1991)believe that corporate profitability remains, at best, unchanged after acquisitions and, in many cases, diminishes. The summary of the paper suggests that takeovers improved profitability in only about 40 percent of cases and in the others, profitability remained, at best, unchanged, but usually declined.

Shantanu Dutta and Vijay Jog (2009) investigated the long-term stock return performance of Canadian acquiring firms in the post-event period by using 1300 M&A events in the 1993--2002 period. They concluded that there are no significant long-term negative abnormal returns for Canadian acquirers. Ingham, Kran and Lovestam (1992) inferred from their research that, to assess the effects of mergers, it is necessary to determine how their impact is to be measured. The two criteria identified by them are accounting measures of profitability and the share price.

Holmstrom (2001) examined changes in the merger activity and corporate governance mechanism in the US. He concluded that there is a rise in merger and acquisition activity for the period 1980 until 1999 and that the corporate governance mechanism has evolved from leveraged hostile takeovers and buyouts in the 1980s to incentive-based compensation in the last portion of the 1990s. Altunbas and Ibanes (2004) provided evidence that bank mergers in Europe resulted in an improvement in the companies' return on capital, particularly on cross-border mergers, because of organizational and strategic fits. They found out that the improved performance can primarily be attributed to the broad similarities between merger participants.

Mantravadi and Reddy (2008)found empirical evidence that, overall, companies in India are experiencing slight increases in their profitability following the merger or acquisition. However, the impact is different when different industries are considered in isolation.

Many information technology (IT) specialists agree that the software industry has entered a phase of maturity in the last few years. Leger & Quach (2009) studied the impact of the characteristics of software product portfolios on the performance of firms involved in a merger of software companies. Their study showed that markets generally seem to neglect the characteristics of software product portfolios when the merger is announced. They add that beyond the traditional antecedents the performance of combinations of software companies should be positively impacted by the virtual network effects that result from the compatibility and complementarity of the new entity's software products. The impact of these two factors on the short-term market performance of both the entities' stock at the time of the announcement on the value of the transaction and on the long-term financial performance of both entities needs to be considered when measured alongside the impact of more traditional variables.

Many authors have studied the factors influencing the performance of business combinations (Brouthers et al., 1998; Lehto & Lehtoranta, 2004; Seth, 1990). Taken together, these studies suggest that the main performance antecedents relate to four factors justifying the combination's economic potential: the potential for market growth, the potential for economies of scale, the potential for economies of scope, and the potential to acquire competencies.

Carlaw and Lipsey (2002), derive that the two Information Technology based products are complementary when their joint use adds more value for the customer than the sum of the separate use of the same products. Prabhu et al. (2005) state that, for acquisitions to promote innovation, firms must first engage in internal knowledge development. Bannert and Tschirky (2004) also concentrate on the importance of internalizing external knowledge, and identify the lack of integrative decision-making, of systemic processes and of a holistic change of both companies during the integration as the main causes of failed acquisitions. Paruchuri et al. (2006) take these results one step further by hypothesizing that the productivity of corporate scientists at acquired companies is generally impaired by integration, due to the loss of social status and centrality in the process. This can be assumed to be particularly true of technological firms. Tsai and Hsieh (2006) claim that the application of "two-stage grey decision-making" can assist corporations in selecting technological assets to create wealth through mergers, whereas Haro-Dominguez et al. (2007) find that the degree of "absorptive capacity" has a positive influence on both internal and external acquisitions of technology.

Among the recent studies Singh...

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