Indira
Gandhi Institute of Development Research.
Vardhana Saple Pawaskar
Educational Qualifications
Ph.D.from Indira Gandhi Institute of Development
Research, Bombay.
2>Obtained Post Graduate Diploma in Development Policy in 1994-1995 with B+ grade, GPA of 3.30/4.00
at Indira Gandhi Institute of Development Research, Bombay
3>Obtained Bachelor of Engineering (Electronics) in 1993 in the First Division Ramrao Adik Institute
of Technology, New Mumbai affiliated to University of Bombay
Thesis Title
Diversification, Merger and Their Effect on Firm Performance: A study of the Indian Corporate Sector
This work analyses:
The motives for product market diversification
Effect of diversification on performance of the firm: Existence of an optimal level of diversification
Performance of the conglomerate firms: A comparison of the product market and capital market performance
of the Indian conglomerate
Merger and its effect on the performance of the firm
Thesis Supervisor
Dr. Subir Gokarn, Assoc. Professor, IGIDR
Dr. Rajendra Vaidya, Assoc. Professor, IGIDR
Research Interest
Applied Industrial Organization, Applied Corporate Finance, Mergers and Acquisitions
Research Papers presented in conferences
"Motives for Product Market Diversification: A study of the Indian Corporate Sector", presented at the
conference on Recent Advances in Quantitative Methods, application to economic problem, held in December
1998, at The Indian Statistical Institute, Bangalore
"Diversification, Merger and Their Effect on Firm Performance : A study of the Indian Corporate Sector",
presented the thesis abstract at the National Doctoral Consortium held in November 1998, at The Indian
Institute of Science, Bangalore
"Performance of Conglomerate Firms: A study of the product market and capital market performance of Indian
conglomerates", presented at The Annual Conference held in January 1996 of The Indian Statistical Institute,
New Delhi
"Existence of an Optimal Level of Diversification: A Case study for Indian Conglomerates", paper jointly by
Vardhana Saple and Saumitra Bhaduri, accepted at The 33rd Indian Econometric Conference, Mar 3-5, 1997 at
the University of Hyderabad.
Research Assistantship provided
Primary data analysis for the study "The Automobile Components Sector in India – An Analysis of Structure
and Performance", by Dr. Subir Gokarn and Dr. R. Vaidya Sept. 1998
Primary data analysis for the "Project on Land Consolidation", under Dr. S. Geetha, Dr. P.G. Babu and
Dr. S. Mahendra Dev, Proceeding/ Project Report No.20, May 1996, IGIDR
Participated in the survey for the Contingent Valuation of Borivli National Park conducted by IGIDR,
Bombay during October 1995 to March 1995. The results are contained in the report "Are people willing
to pay for Natural Resource Preservation: Evidence from a contingent valuation of the Borivli National
Park, Bombay" by Hadkar et all (1995), IGIDR Discussion Paper.
Computing Skills
Operating Systems: UNIX, Windows 95, MS-DOS
Languages: C, AWK
Statistical Software: LIMDEP, SAS, GAUSS
References
Dr. Subir Gokarn,
Assoc. Professor,
Indira Gandhi Institute of Development Research.
Prof. Anindya Sen,
Professor,
Indira Gandhi Institute of Development Research.
Dr. Rajendra Vaidya,
Assoc. Professor,
Indira Gandhi Institute of Development Research.
A Brief Note on the Thesis
Diversification, Mergers and Firm Performance : A study of the Indian Corporate Sector
Diversification is the process by which the modern corporation extends its activities beyond
its current product range and markets in which it currently operates. The literature has identified
three explanations for diversification:
(a) as a response to specific opportunities synergy and internal capital market;
(b) as a response to specific threats risk hedging against demand fluctuations and
(c) as a general policy for growth the agency cost and managerial motive.
This work attempts to identify the pattern of product market diversification for firms. The study has
been done for a panel of 525 firms, for a period from 1992 to 1995. The three prime motives tested for
diversification are synergy, risk-hedging and growth. The synergy motive has a stronger support as
compared to the other two. It is seen that in case of these firms, the lower asset utilization as
compared to the industry average, in other words the excess capacity, is the main reason for a firm to
diversify.
Diversification is undertaken by the firms to improve their profits and in turn the performance.
The analysis is done for the same 525 firms for the period 1992 to 1995. It is seen that the increase in
diversification has a positive effect on the performance of the firm depending on the level of asset
utilization by the firm as compared to the industry average. It is seen that in case of firms with a
very large excess capacity which have been highly inefficient, further diversification into new activity
would reduce the firm profits. In case of firms with the asset base around the industry average, i.e. firms
using the large amount of the existing capacity, further diversification without new investment does not
significantly effect profitability. Between the two, lies a range of values of the asset utilization by
the firm, where the assets can be put to more profitable use.
The diversified firms can be classified as horizontal, vertical or conglomerate, depending on the
type of linkages the new activity has with the industry in which the firm operates. Among these diversified
firms, we next focus on the performance of the conglomerate firms by examining both the operating and market
related characteristics. Firstly, we compare the conglomerate performance with a benchmark portfolio of
industries in which the firm is diversified. Depending on the score of the company profitability above the
benchmark the conglomerate is classified as ‘good’ or ‘bad’. A set of financial characteristics which
differentiate the two groups of firms are identified using the Multiple Discriminant Analysis. Secondly,
samples of conglomerate and non-conglomerate firms are compared within the framework of the capital asset
pricing model. The market related analysis suggests that while the conglomerate firms achieved a level of
performance comparable to the considered non-conglomerate firms, their performance was not at all outstanding.
The data is of 30 conglomerate companies and 30 non-conglomerate companies, which are comparable with respect
to the size and the primary industry in the initial years. The data covers a period from 1989-1995.
In the last part of this work, we focus on the performance of the firms that have gone in for a merger.
In this chapter the following questions are addressed:
Can successful mergers be predicted on the basis of pre-merger characteristics of merging firms?
Does the firm performance improve due to merger or is it the competitive forces affecting the persistence of
their profits? The implication is that competitive forces themselves may have led to profit changes without merger.
The sample here of 36 acquired firms and a matched sample of acquiring and non-acquiring firms. The firms have been
involved in a merger in the years 1992-1995 for which data were available. The data is taken from the Capital Line
OLE database.
In case of the mergers we find that merger results in a once-and-for-all growth of the firm in terms of assets.
This does not contribute to the acquiring firm’s growth rate in subsequent years. It is seen that the diseconomies of
growth are not overcome through merger. Merger has significant advantages only in terms of the debt position of the
acquirer. The type of mergers whether horizontal, BIFR or between group companies and subsidiaries do not significantly
affect the post merger performance. The analysis shows that there is an averaging effect and the competitive process is
reinforced with mergers. This result has important policy implications. Mergers leading to formation of monopoly were
scrutinized under the Monopolies and Restrictive Trade Practices Act, 1969, until 1991, when the ‘monopolies’ section
of the Act was abolished. In the period of study from 1992 to 1995 there are no other anti-trust laws prevalent in India.
The result shows that even without the anti-trust laws restructuring of firms through mergers did not have any anti-trust
laws restructuring of firms through mergers did not have any anti-competitive effects. The age effect shows that the firms
were correcting for the previous decisions.
Some additional points to highlight from the thesis are:
Use of rigorous econometric techniques like Panel Logit model, Threshold Regression Model and Multiple Discriminant Analysis.
Use of latest statistical packages like SAS, LIMDEP and GAUSS
Working knowledge of Corporate Information in Magnetic Medium (CIMM) and PROWESS database of the Centre for Monitoring Indian
Economy and the Capital line-OLE database compiled by the Capital Market Publishers.
