“Dynamics, Structure and Functionality: a Case Study of Mergers and Acquisitions In Pharmaceutical Sectors of India” |
M&A turned out to be significant form of corporaterestructuring in post globalization period in Indian industries. The phenomenonis considered to be the most important strategy for gaining competitiveadvantage for firms. This study attempts to find out the determinants ofM&A in Indian pharmaceutical industry. We use the PROWESS database provided by the Center forMonitoring Indian Economy for the period of 2001-2010. The results of the Logitanalysis suggests that large and multinational affiliated firms are investingmore in M&A activities. Similarly, firms reporting excess capacity and highR&D investments are relying heavily on M&A to restructure andconsolidate their position in the industry. This paper examines the determinants of M&A in thepharmaceutical-biotechnology industry and the effects of mergers usingpropensity scores to control for endogeneity. Among large firms, we find thatmergers are a response to excess capacity due to anticipated patent expirationsand gaps in a company’s product pipeline. For small firms, mergers are primarilyan exit strategy for firms in financial trouble, as indicated by low Tobin’s q,few marketed products, and low cash-sales ratios. Conversely, small firms witha relatively high Tobin’s q, a large number of marketed products, and highcash/sales ratios are less likely to engage in any M&A activity. We find that it is important to control for a firm’sprior propensity to merge. Firms with relatively high propensity scoresexperienced slower growth of sales, employees and R&D regardless of whetherthey actually merged, which is consistent with mergers being a response todistress. Controlling for a firm’s merger propensity, large firms that mergedexperienced similar changes in enterprise value, sales, employees, and R&Drelative to similar firms that did not merge. Merged firms had slower growth inoperating profit growth in the third year following a merger. Thus mergers maybe a response to trouble, but they are not an effective solution for largefirms. Neither mergers nor propensity scores have any effect on subsequentgrowth in enterprise value. This confirms that market valuations on averageyield unbiased predictions of the effects of mergers. Small firms that mergedexperienced slower R&D growth relative to similar firms that did not merge,suggesting that post-merger integration may divert cash from R&D.