Measurement of synergy in merger & acquisitions: A panel data approach using composite variable (principal component analysis)

Abstract

AbstractThe primary purpose of this research is to look into the Impact of cash payment on Operating and Financial synergies generated post the merger. The two‐stage least squares method Instrumental‐variables regression technique is employed to test the hypothesis of impact of cash payment on the synergies gained by the acquirer post the merger. The uniqueness of this paper is that it develops an effective technique for evaluating the phenomena of M&As using a composite synergy variable that accurately reflects the dynamic phenomenon. The paper uses “Principal Component Analysis” (PCA) estimation to generate dependent variable which is a conglomerate of several factors. For all models, the findings of the study reveal that payment in cash has a favorable and significant relationship with Operational and Financial Synergy, demonstrating the increased viability of acquiring entities in post‐M&A stage. Synergistic advantages of M&A appear to be perceived by enhanced Operating Income, improvement in R&D expenditure (statistically significant) and a positive Return on Asset (non‐significant). The paper looks at a wide variety of domestic M&A transactions in India. So far, no systematic research has been done to determine the possible realization of synergistic gains for Indian firms undergoing M&As.