This issue of the journal has an interesting mix of research papers and a case study. The first paper, “Exploring Improvements of Post-Merger Corporate Performance: The Case of Egypt”, by Tariq H Ismail, Abdulati A Abdou and Radwa M Annis, looks at the improvements in corporate performance in Egypt against a post-merger backdrop. The authors identify two sectors viz., construction and technology for this study. Taking profitability, efficiency, liquidity, solvency, and cash flow position as indicators, the authors try to establish the linkage. The study shows that, in the short-term, the construction sector actually benefited from the Mergers and Acquisitions (M&A) activity, especially in terms of profitability, while it was not so for the technology sector. Other indicators of performance did not show any significant gains either. The authors are of the opinion that M&A had different impact across sectors but on the whole did not improve the performance of the companies as such.

The second paper, “Determinants of M&A Success in the Pharmaceutical and Biotechnological Industry”, by Marc Kirchhoff and Dirk Schiereck, looks at the pharmaceutical and biotechnology industry and tries to identify the determinants for M&A success. The authors use event study methodology to analyze the success of worldwide M&A transactions in selected industries between 1996 and 2006. Results show insignificant announcement effects. The targets benefit from highly positive abnormal returns, while the acquirers, as proven by earlier studies, reduced their shareholder value. The authors find a strong evidence that sales synergies are actually valued by the stock market as key success factors for pharma and biotech M&A, while cost efficiencies did not have any impact on returns. Transactions are valued to be successful if the acquirer has a weak, but the target has a strong R&D performance. The stock market reacted positively when the acquirer had strong liquidity.

The third paper, “Differentiating Characteristics of Acquiring Firms”, by Shantanu Dutta, delves into the differentiating factors of acquiring firms from a study carried out in Canada. Using the data from the completed M&A deals between 1997 and 2002, the author has empirically tested the differentiating factors of acquiring firms from the perspective of the agency theory. He raised three fundamental issues: Are there any firm-specific characteristics that differentiate acquiring and non-acquiring firms, the manner in which acquiring firms use cash reserves for ‘empire’ building activities and how acquiring firms differ from non-acquiring firms in terms of governance? Results of the study prove that firm-specific financial and technical variables like higher cash reserves, past performance and higher R&D focus (high-tech firms) are more likely to be acquirers. With respect to firm-specific governance variables, the study reveals that acquiring firms have higher pay ratios, higher board size and lower blockholder ownerships. There was strong support for ‘empire-building’ motive behind M&A.

Finally, we have a case study, “3i Infotech: Developing a Hybrid Strategy”, by Udbhav Shah, Sakshi Goenka and Surajit Ghosh Dastidar, on hybrid growth strategy adopted by 3i Infotech. 3i Infotech, at a point in time, was just a processing unit of ICICI. From a modest beginning in 1999, it grew by leaps and bounds, and today it offers a range of software and IT solutions including packaged solutions for banking, financial services and insurance, manufacturing, contracting and retail industries. The success of 3i Infotech is largely attributed to a hybrid strategy of products and services that allowed the company to reduce the risk of doing business. The authors are of the opinion that companies that move with the changing times have a better chance of succeeding in the business environment. The authors wonder whether Indian software companies will be in a position to move up the value chain and become strong product companies like Microsoft and Oracle.

-- Venu Gopal Rao
Consulting Editor