Abstract

In previous few decades, mergers and acquisitions have become common. There are many advantages of mergers and acquisitions. These benefits motivate organizations to merge with other organizations. But there is still confusion that whether mergers become successful or not in terms of organizational growth objectives. To clear this confusion, this research is conducted.  The aim of the study is to understand and analyze the growth issues in the merger activity. This study used quantitative research methods and it is based on both primary and secondary data. Primary data is collected through a survey and secondary data is collected through financial statements of the GlaxoSmithKline. This study uses the case study strategy, thus the case of GlaxoSmithKline is taken for this particular study. For analysis, financial key performance indicators and ratio analysis is conducted. Analysis of key performance indicators includes sales growth, net earnings growth, research and development and relationship of operating expense and revenue generation. Financial ratio analysis includes the current ratio, the quick ratio, the debt ratio, debt to the equity ratio, return on equity ratio, return on the assets ratio and gross profit margin. Post and pre merger analysis of GlaxoSmithKline is conducted for thirteen years.  The results of financial analysis showed that motives of mergers were effectively achieved and GlaxoSmithKline became better able to grow in terms of revenue and shareholders’ value. The survey that has the sample of 50 management people from the case organization showed that merger activity has proved successful. With the help of proper management and planning, causes of failures in mergers can be avoided and an organization can become successful. At the end of this study, limitations of research and future recommendations are given.

Keywords: Mergers and Acquisitions, Growth, GlaxoSmithKline, Success of Mergers and Acquisitions

Chapter 1: Introduction

Background

Mergers and Acquisition has been the focus of many researchers from last few years because of many debatable issues related to Merger and Acquisition. In the last two decades, there has occurred a large number of merger and acquisition activities. Corporate executives believe that this is a useful tool for achieving objectives of corporate growth with the help of synergies. Researchers state that such activities are profitable for organizations because of expense reduction, economies of scales and improved market power. Along with this, there is another school of thought where researchers state that mergers and acquisitions have more chances to fail than to succeed. The literature states that 80% of mergers and acquisitions could not succeed.

According to Eisner et al (1999), the most desirable objective of M&A is to ensure strategic change in a corporation. M&A are occurring in all industries of Europe, the US and other countries. Like other industries, pharmaceutical industry is not left behind in this activity. As mentioned by Coles et al (2002), since the mid of 1980’s, there has been invested more than $400 million on M&A in pharmaceutical industry. This industry faces intense challenges of corporate growth and improved shareholder’s value. The main purpose to merge in this industry is to cater the market and economic growth pressures. Examples of these pressures are the efficient new production development process, expiry of patents, regulatory reforms and conservatism, market stringency and others. These pressures have raised certain concerns for industry and results in M&As in pharmaceutical industry. So when organizations face such pressures, top management considers M&A as a core strategy for growth (Cap Gemini et al, 2002).

There are various factors that forces organizations to merge and acquire. According to Porter (1980), it is a condition when two businesses become one to gain competitive advantage. It is not at all easy to merge two businesses because it involves many complexities. The most common benefits of mergers are increased market share, expanded product line, improved financial strengths, the establishment of seasonal businesses and access to technical talent (Tkachenko and Fiabedzi, 2001). As said by Patrick et al (2000), mergers and acquisitions are useful for the increasing market share by having access to a wider customer base. For example, if the target business has efficient distribution channels, then both businesses become able to merger their distribution channels and have a wide customer base. This, in turn, increases the market share. M&A are useful for diversifying product lines and services, thus both organizations can increase seasonal products as well (Ferreira et al, 2009). According to Griffin (2013), with a wider product line, they have no problem with products that generate seasonal revenues. With increased assets, the financial position of businesses increase and organizations become able to have access to more funds. As explained by Patrick et al (2000), quality staff and technical talent can be accessed through this growth strategy. For example, if one business has employees with good research and development skills and other company has employees with efficient marketing skills, then these both firms can join and work together and create a win-win situation where both companies get benefit. It also increases the value and efficiency of resources. Along with this, organizations become better able to utilize the resources. This results in increased shareholders’ wealth. There are other researchers who say that M&A is not useful for organizations because it does no increase the performance (Hitt et al, 2001).

As stated by Coles et al (2002), pharmaceutical industry started facing mergers in 1980’s and an intense wave was observed in the mid 1990’s. The most famous mergers were of Astra and Zeneca, Pfizer and Warner-lambert, GlaxoWellcome and SmithKline and Beecham. These all mergers were because of increased market pressure and other concerns like regulatory pressure and patent expiry. The expected benefits of mergers in the pharmaceutical industry are reduced the cost for research and development, the merger of research and development process, better utilization of manufacturing capacity and other resources. Capgemini et al (2002) have mentioned that even because of the low success ratio of M&A, pharmaceutical industry opt for M&A to crate market muscle, cost reduction with consolidation and geographic coverage.

Even though, there are many extravagant advantages of M&A, research have showed that its success rate is not satisfactory (Schermerhor, 2011). According to Patrick et al (2000), it is also observed that large corporations use different techniques and financial tools to misrepresent their financial condition to satisfy shareholders. Therefore, as said by Ferreira et al (2009), it is really difficult for shareholders to investigate the performance of company after the merger. This shows that there is a strong need of fair and transparent financial analysis of the company to clearly assess pre and post merger performance.

Problem Statement

Even though mergers and acquisitions have gained popularity because of its benefits, there is still confusion regarding its effect on the growth of corporation. Corporations involve in this activity with the goal and expectations of growing concern cannot achieve goal and expectations to deliver value to its shareholders. According to Lamoreaux (1985), a study has concluded that on mergers between 1990 and 2000, the value of all mergers increased ten percent in the same period, but only 17% showed the significant value . There were 50% mergers in which value of shareholders was deteriorated. Researchers assert that M&A usually does not show satisfactory good economic results. There exists a paradox situation that firms that engage in M&A, whether they get results that are aligned with their expectations or not, if not it is also not clear that why they engage in such activities.

It cannot be said that corporate executives are not familiar with this low success rate of mergers and acquisitions. Corporate executives clearly know that this involves many risks. Along with low success rate, there are also many stereotype risks that are associated with M&A. The examples of such risks are volatile product price, cultural difference in management, over payment risk and others. It has been observed that the corporation usually involve in such activities that reflect success in the annual report, irrespective of the actual performance of organization. This is done to present a pleasant picture to shareholders regarding the performance of company. Companies take help of distinctive accounting policies to present performance better than actual. With these accounting policies, higher profits, growth and market value is showed to shareholders, just to make them satisfy with the merged company’s performance.

This study is conducted to investigate and analyze a case organization i.e. GlaxoSmithKline (GSK), for finding its performance and profitability after the merger. Before the merger, GlaxoWellcome (GW) and SmithKline Beecham (SKB) were two organizations and as a result of merger GlaxoSmithKline was established in Dec, 2000. In this study, financial analysis is conducted to reveal the truth about performance and growth before and after merger.

Aim of the Study

This study aims to understand and analyze the growth issues in the merger activity. 

Objectives

Aim of the study will be achieved through objectives. Objectives of this study are following.

1. To review literature on issues related to the merger and acquisition
2. To investigate the usefulness of merger activity for growth of merged organization
3. To investigate whether merger activity delivers value for merged organization
4. To investigate whether merger activity brings revenue as expected
5. To conduct a survey of management at GlaxoSmithKline (GSK) to investigate the impact of the merger on corporate growth objectives

Research Questions

Following research questions are answered in this study.

1. What does literature review say about issues related to mergers and acquisitions?
2. Is merger activity useful for growth of the merged organization?
3. Does the merger activity deliver value for merged organization?
4. Does the merger activity bring revenue as expected?
5. What is the view of management of GlaxoSmithKline for impact of merger activity on corporate growth objectives?

Significance of Research

This research provides practical evidence regarding merger activity. Thus, the results of this study are beneficial for many stakeholders. Investors can get to know about a firm’s performance who is intending to merge with another organization. Investors can assess the performance of merged organization in a more realistic manner. The management of organizations can have a real example of GlaxoSmithKline (GSK) that how successful it was to achieve the objectives of growth with the merger. Thus, management can make better decisions with respect to performance lapses and achievements. This research is also quite useful for researchers, students and public as this research is a contribution in existing literature related to issues in mergers and acquisitions as a growth strategy.  It can be said that this research is significant for all stakeholders.

Structure of the Dissertation

Introduction: In this chapter, the background of topic along with definitions of key terms is provided. Along with this, the aim and objectives are defined for the dissertation. After this, research questions are developed. Then significance of the study is also determined in this chapter.

Literature Review: In this chapter, the theoretical foundation of this dissertation is developed. The literature related to causes of failure, critical success factors, sources of synergies, and determination of success and failure of mergers is discussed.

Research Methodology: In this chapter, research strategy, choice and justification of research method and data collection techniques are explained. After this, scientific evaluation consisting of errors, validity and reliability is discussed. At the end of this chapter, ethical considerations are discussed.

Findings and Analysis: This chapter starts with the history of organizations. This chapter also discusses the motive of mergers for both organizations. Next, the key performance indicator analysis is done for pre and post merger organization. The key performance indicators for this study are sales growth, net earnings growth, research and development analysis and relationship between operating expense and revenue. After this, financial ratios are compared for pre and post merger period.

Conclusion: In this chapter, the conclusion is drawn on the basis of findings and analysis. This chapter also analyzes the fulfillment of aim and objectives. Future directions for researchers are also provided in this chapter. The research limitations and practical implications are also part of this chapter.

 

 

Chapter 2 - Literature Review

2.1. Theoretical Studies

There are many theoretical studies that describe that many mergers and acquisitions remained unable to deliver the desired performance to shareholders. Along with this, there were many cases when mergers were completely disastrous and failure was the ultimate result. Cap Gemini et al (2002) mentioned that major and mega mergers were started in the 1980s and 1990s. These mergers occurred to gain advantages of market diversity and improved market share. Most of the firms were not successful in achieving these advantages for a longer period of time. From this situation, many unanswered questions related to failure of organizations to achieve the targets, arise. The only answer of this question was that it is because of the few common factors that resulted in these corporate failures. These factors range from failure to achieve synergy and reduced cost objective, failed to diversify and the ineffective policy making by management. As said by Ruth & Janis (1985), synergy is the formation of an intact that is more than the sum of parts. The most common objective of M&A is to enjoy the benefits of this synergy and failure to achieve this objective leads to corporate failures. M&A also occur because corporations become able to enjoy the reduced cost of production with economies of scale. It is also a strategy that is for diversifying the business or products. M&A is a strategic decision and it needs strategic thinking of management with efficient abilities to develop appropriate policies for making strategic decisions.  When corporations cannot fulfill these objectives, this becomes the major hurdle for organizations to be successful in enjoying the benefits of mergers and acquisitions. Thus, this shows that it is important to look into the factors that cause failure and factors that critical for success.

2.2. The Cause of Failures

As said by Pautler (2001), different researchers have portrayed distinctive reasons for failure of M&A. According to most of the researchers, the major reason of failure is when the merged company remains unable to deliver value to shareholders and the merger company cannot achieve its objectives (financial, commercial and strategic). The causes of failure can be different for different industries. In pharmaceutical industry, failure is because of inability to achieve synergy and reduce cost. When the objectives of efficient resource usage, tax saving, the market capturing and post integration are not achieved, this also results in failure. Along with this, when management gives priority to the personal interests and underestimates shareholders’ interests, the ultimate outcome is failure of merged company. Basically, this leads to distraction from goals and objectives of merger activity, and mega failure occurs.

2.2.1.Talent Management and Cultural Differences

Hariharan (2005) have mentioned that talent management is important for merged organizations. When organizations do not manage its talent in an effective way, failure is the ultimate result.  Similarly, every organization has specific believes assumptions and rules of conduct that are important for the effective working of organization. So, when two organizations merge there is a huge difference in organizational cultures of both companies’ employees. In this situation, it is important to develop mutual understanding in employees of both organizations. In words of Steven et al., (2008), organizational culture is defined as manners and conduct of people that works in an organization to interact within and outside the organization. Vision, mission, values, norms, beliefs, habits, and assumptions are also part of organizational culture. Bargeron et al (2012) states that corporate success in M&As is heavily influenced through organizational culture of both firms. In history, M&As has faced failure because of differences in corporate cultures and inability to deal these corporate differences. The most common example is of Daimler-Chrysler and Sprint-Nextel that resulted in losses of billion dollars because of ineffective management of organizational cultural differences. A study conducted by Perrault (2013), has concluded that organizational cultural is much important in influencing the success of M&A. Therefore, effective and efficient decision making process is needed to manage cultural differences. When an organization could not manage these cultural differences, the success of the organization could not be assured.

2.2.2.Ineffective Integration planning after the merger

It is of the utmost importance for the merged organizations to do a proper planning for post acquisition or post merger integration planning. If companies aim to achieve synergies, then both of the firms must have excellent ability to integrate. When companies do not have integration ability, synergies of mergers could not realize, thus the merged organizations face failure (Roll, 1986). In M&A, synergy means that both target and acquiring companies win with this deal. Usually, with synergy, M&A activity results in shares premium through acquisition and the acquirer gets the increase in shareholder value (Ranft and Michael, 2002). As said by Fisher et al (2010), the only tangible justification for M&As is this synergy. When merged organizations, the plan integration process effectively with a discipline, transparent and well-defined approach, the chances to gain synergies increases. The suggested approach is 1) model, 2) execute and 3) track synergy in a proper way. The modeling of synergy is to conduct value driver analysis. The execution of synergy is to create a proper and detailed plan to allocate resources for activities. The tracking of synergies is to implement such approaches through which synergy can be tracked and reported, effectively. As said by Rankine (2001), it is the responsibility of managers to integrate strategies of two organizations with the merged organization’s strategy. When managers remain unable to do so, the ultimate consequence could be a failure. At this time, poor communication, ineffective change management and task management and lack of effective leadership can also become a reason of lack of integration, creating troubles for the merged organization.

2.2.3.Knowledge about particular industry

Hariharan (2005) asserted that the merged organizations are required to have complete and detailed knowledge of manufacturing process and facilities, product development procedure, networks of markets, management profiles and efficiency of employees of the other organization. When organizations lack this knowledge, they face many problems resulting in failure of merger activity.

2.2.4.Over Estimation of Synergies

A very common phenomenon in mergers and acquisition activity is that management over estimate level of synergy prior to M&A. Thus, with this over estimation, they pay the premium to other party for acquisition or merger, this result in a negative net present value of the business. Thus, the over estimation of synergies can also be declared as a cause of failure of mergers (Neely and Rochester, 1987).

2.2.5.Paying more for less

As stated by Roll (1986), in most of the cases, organizations bid very high in competitive bidding process, only to win the attractive target firm. Thus, when they over-pay for it, organizations realize vulnerable results. These results become more vulnerable when synergy could not be developed after merger.

2.2.6.Lack of Customer Focus

Whatever the situation is, organizations cannot ignore customers. When organizations ignore their customers and remain busy in the internal process of managing merger activity, the essential part of the company is left behind. This creates the problem and affects the repute of the merged organization. Organizations can also lose their customers in this process thus this also become a cause of failure of the whole merger activity (Neely and Rochester, 1987).

2.2.7.Financial Analysis

Mostly, organizations decide and finalize the merger or acquisition by relying on financial analysis from financial statements of the company. This often becomes the biggest mistake for organizations because sometimes financial statements cannot provide the real picture. They must make sure to conduct an audit to analyze the financial condition of a firm. When firms ignore this audit process, important issues like the quality of receivables and problems of litigation are also ignored. After merger and acquisition, it results in failure (Ravenscraft and Scherer, 1989).

2.2.8.Due Diligence Process

It is essential to have an adequate due diligence process to avoid potential problems in post M&A. With this process, merged firms can identify problems and resolve problems before these become difficult to manage. Forecasting and business performance can also be managed in an effective way with this diligence. When the merged firms have inadequate due diligence, the ultimate result is failure (Dickerson et al, 1997).

Critical Success Factors

There are many different factors that results in corporate failure after the merger. Similarly, there is a high probability of failure in this merger activity. Still, all over the world, this is considered as a strategy for corporate growth. The realization of synergy, cost reduction and market expansions are critical to increase the shareholders’ value. This is still unclear what is the reason motivating the pharmaceutical company to merge, even when the success rate is this much low (Cornett and Tehranian, 1992).

As stated by Cap Gemini et al (2002), pharmaceutical companies merge and acquire other organizations to create market power, cost reduction, increased geographic coverage and pipeline stuffing.

2.2.9.Creation of market power

As said by Cap Gemini et al (2002), the first merger activity occurred in the period of 1980s-1990s in the pharmaceutical industry. The aim of this transaction was to reap the benefit of increase market power. This market power can only be achieved through M&A and that is the reason pharmaceutical organizations incur such transaction.

2.2.10.Cost Reduction

In pharmaceutical industry, the research and development process is critical to success. This process often has the higher costs than other functions. Thus, organizations merge with other organizations to reduce the cost of research and development with the consolidation of research and development departments of both organizations. There are many examples of the companies when they were quite successful in achieving cost savings up to 10.08% (Dickerson et al, 1997).

2.2.11.Increase geographic coverage

According to Healy et al (1992), the business of pharmaceutical industry can have products all over the world; the only required thing is to have sales force. Definitely, all firms have limited sales forces, and this does not allow them to broaden their geographic scope. With M&A, organizations can get access to resources of the other organization as well thus they can broaden the geographic coverage. A very good example is of a cross border merger between Pharmacia and Upjohn. Before merging, both organizations have limited geographic scope to Europe only. With merger, they become able to broaden the geographical coverage to other global areas.

2.2.12.Pipeline Stuffing

According to Cap Gemini et al (2002), the most important reason for M&A is the shortfall in Research and development (R&D) pipeline. As defined by Samson and Daft (2001) Research and development is a group of critical activities in an organization. The most important and primary function of  this R&D is to create and develop the new process, discover knowledge about technological and scientific aspects of products, services, and processes to increase the quality of an organization’s offerings. In short, R&D is the most critical department of all corporations. Cap Gemini et al (2002) mentioned that when companies have no other options because of R&D shortfall, they opt for M&A. An example was observed in 1995 when Glaxo was facing such shortfall in R&D and its patent of Zantac (best drug for stomach acid) was about to expire. It had to face many problems because of this situation. Thus, it made a decision to merge with Wellcome and renewed its pipeline of products. It became able to create an innovated asset and have products like Seroxat.  

Along with critical success factors, it is important to discuss sources of synergies as well. It is essential for the merged organizations to achieve this synergy for being successful.

Sources of Synergies

As stated by Collantes and Jimenez (2007), synergy has four types, namely enhancement of revenue, reduction in cost, decreased taxes and decreased the cost of capital. When two firms merge, both firms generate a higher level of revenues as compared to previously working, separately. Merged firms become better able to generate more revenues because of gains through marketing, strategic benefits and increased market power.

According to Healy et al (1992), along with revenue enhancement, when both firms start working together they can decrease the overall cost. Firms become more efficient and these firms gain this operational efficiency because of economies of scale. Similarly, the average cost of production also decreases because of the decrease in average fixed cost. When mergers are horizontal, that are more famous in pharmaceutical industry, they become better able to decrease the average cost of production. Now, the duplication of resources does not occur and firms can use complementary resources for multiple purposes, thus the average expenses also decreases. Now, resources can be utilized efficiently. In the process of M&A, inefficient management is also eliminated. Thus, with integration of activities and fewer bottlenecks, resources can be effectively utilized resulting in the reduction of cost.

Behind many M&A, one motivation is the lower tax payments. Firms use different techniques to decrease taxes. When two firms combine and merge, they have to pay lower taxes as compared to when they were working separately (Collantes and Jimenez, 2007). When two firms merge, the debt capacity also increases. Now the overall optimal capital structure increases and merged firms can raise more capital through debt. Merged firms can also get benefits through surplus funds. When surplus funds are available, these can be spent on many other things (Healy et al, 1992). For example, the firm can use these funds for paying dividends or it can buy share of other firms.  If firms paid dividend, actually they are saving the tax expense. If firms purchase shares of other firms, at the dividend income from these share taxes would also not be charged (Cap Gemini et al, 2002).

Firms enjoy the lower cost of capital on issuance of securities because merged firms can accomplish economies of scale (Cap Gemini et al, 2002). As defined by Williams (2007), economies of scales are the cost advantages that an organization achieves because of its size, output and scale of operations. As the size, output and scale of operations increases, the cost per unit of output decreases because now fixed cost is spread out to more output units. The cost of issuance of securities is always less for the bigger organizations and by merging the size of the organization can be increased. Schermerhor (2011) mentioned that when scale of operations increases, the operational efficiency increases thus the businesses become able to have lower variable cost also. Cap Gemini et al, (2002) said that with M&A activity, the cost of issuance of securities is always less for the bigger organizations and by merging the size of organization can be increased.

Determining Success or Failure of Mergers

There has been observed many cases of failures of mergers. Researchers have confirmed that every two mergers from three mergers have faced failure. With valuation of mergers, it has also been proved that 83% of mergers showed unsatisfactory performance after one year of deal. They show no business growth and increase in shareholders’ value (Tkachenko & Fiabedzi, 2001).

The merger activity has remained centre of attraction for many researchers, economists and financial experts for a long period of time (Melicher et al, 1993). It is not an easy task to analyze the deals of mergers because this requires depth knowledge of merger entities with different aspects. The previous researches have used three techniques, i.e. accounting, market and interview, for studying the merger outcomes (Tkachenko and Fiabedzi, 2001). The most common approach is the accounting approach because it provides merger’s outcome in a clearer and direct manner.

As already mentioned, it is very complex to analyze and determine the success of failure of a merger activity because of intangible nature of M&A objectives like increase market power, synergy, etc. First of all, it is critical to determine what outcome can be considered as a failure of success of the merger. In accounting studies, success is measured on the consolidation level which means performance of merged companies must be better than the companies would had been doing before merging with each other. The failure is the inability of merged firms to accomplish financial goals and objectives that were decided before the merger deal (Mueller, 1980). 

Few previous studies have also showed the contrary view because they evaluated the performance of M&A with a different perspective. Few of previous studies used the stock prices of acquired and acquiring firms. It was observed that the firm who is acquired gain significant excess returns (Ravenscraft and Scherer, 1989). While the firm who acquires other, does face modest excessive returns in shareholder value. On the other hand, the studies conducted with event method shows the inconsistent results and found negative profits after merger activity (Hogarty, 1970). According to Gilson and Black (1995), in event method, statistical approaches are used to evaluate the impact of a particular event, for example, merger, on the value of the firm. On the other hand, Lev and Mandelker (1972) have observed positive impacts on the profit of the acquiring firms. A study conducted by Martynova et al (2006), considered 155 corporate takeovers in Europe and UK and the result showed that performance after mergers and acquisitions decreases because of the macroeconomic factors. That study used four different operating performance indicators to study the impact of different factors on performance of merged or acquired organizations. This inconsistency in different studies’ results is because of the use of different methodologies to conduct the study (Tkachenko & Fiabedzi, 2001).

According to GrãSgen et al (2010), the accurate determination of success and failure of mergers can be done with comparison, but it is very complex to do. In past, researchers have used different methodologies to compare and critically observe the performance of the merged firms and tried to estimate what would have been their performance without merging and compared it with the performance of the merged firm (King et al, 2004, King et al, 2008, Mikael & Jani, 2011, Rumyantseva et al, 2002). Few researchers evaluated the performance on the basis of ‘absolute performance’ where the performance of the merged organization is compared with pre-merger firms by using the weighted average of companies where companies were assigned the weight according to the size of the merged firms. Few researchers have used ‘relative performance’ to evaluate the performance of merger activity where the merged firms are evaluated on the basis of their relative size. They used control sample and compared it with the post merger performance.

Most of the time, accounting studies uses different financial measures to evaluate the performance of merger activity. The most commonly used measures that are related to profitability of the merged firm are return on assets, return on the capital employed and return on sales. The financial measures related to the shareholders value are return on equity (Carrington, 2009). Considering the aim and objectives of this study, it is important to determine which method would be used in this study. As the researcher aims to investigate the outcome of merger activity on the case organization, it seems more appropriate to use the accounting studies for this study. To measure and evaluate the before and after effects of M&A, it is more useful to study financial performance with the help of accounting measures. As said by Smart and Megginson (2009), the best method to study performance of M&As is through accounting studies. As said by Gitman (1999), through this method, financial performance can be analyzed with different perspectives, such as liquidity, activity, debt, profitability and market value. Thus, the profitability and shareholder value of the case organization is analyzed on the basis of accounting approach. In the following section, literature related to accounting studies is reviewed to develop better understanding.

Accounting Studies

The merger performance can be analyzed in a better way than traditional approaches with accounting studies. Usually, financial experts and economists rely on accounting studies for evaluation of performance of merged firms and they analyze the financial performance of one to five years. The most common measures are of ratios of earnings, cash flow, productivity and profitability (Kaplan, 2006). As also asserted by Pautler (2001), accounting data of the firm can be analyzed and compared for before and after the merger. He mentioned that rates of return, expense ratios, and profit margins along with other financial measures can better predict the overall performance of a merged firm.

In accounting studies, financial economists, such as Powell and Stark (2005) and Rahman and Limmack (2004), ignore other confounding factors by controlling them and do comparison of post merger and pre merger only on the basis of financial performance. Sometimes, the financial performance is also compared with the industry averages to analyze whether the merged firm has satisfactory performance or not. As described by Kaplan (2006), the assumption in all accounting studies is that merger and acquisition are enough significant to bring changes in performance of organizations and all other factors do not bring any change in financial performance of the merged firm. Thus, on the basis of this assumption, in accounting studies all other external factors are ignored. It does not take into account aspects like management capability. As stated by Amihud and Miller (1998), like all other approaches, the accounting approach to study performance of the merged organization also has few pros and cons. Sometimes, use of accounting approach is declared as biased because firms usually use those financial and accounting measures that have implications for the profits of the firm. The accuracy of outcomes is based on the way accounting is done and which policies are being used in pre and post merger period. The problems and issues related to different accounting methods and policies are also part of this literature review. 

2.2.13.Issues Related to Financial Accounting Data

According to Tkachenko & Fiabedzi (2001), firms can use financial accounting data for evaluation of performance but the problem is that what is used for doing this analysis. Financial economists ask questions like what would be the profitability condition of a merged firm without being merged. Such questions can never be answered with full certainty. So, financial economists compare the merged firm performance with the few control sample groups. When the pre and post merger analysis of performance is done, one problem occurs that is related to the consolidation of firms. As stated by Bragg (2007), controlling the analysis of big corporate mergers is often considered unreliable analysis because of systemic differences associated with the size of the firm. The systematic difference is the measureable difference in size of firms. This is a fact that firm with increased size has higher profitability, vice versa. Therefore, by controlling the measurable differences, this error because of size is controlled. Therefore, to avoid this problem the performance of the merged entity is often compared with individual business units, segments or product lines. Thus, the comparison can either be done before and after the merger or with other business units of the same size and industry. In this study, post and pre merger analysis is used.

2.2.14.Implications and Accounting Methods for Mergers

While doing analysis of merger performance, another issue is related to the accounting method that is used for merger accounting. It is critical to analyze that whether consolidate accounts of the merged firms represent the fair and true picture or not. There is an alternative method to look at consolidation accounts that is named ‘pooling of interest’. This method was introduced by the USA and became popular all over the world, including UK (Watts, 1996).  This method of merging says that if two firms join together then the total resources of the merged firms should equal the separate assets of both firms.  In this method, assets and liabilities of both firms are simply added with each other. In this method, revaluation of any assets does not occur. It is simply the pooling of interests and no firm is purchasing another firm, therefore there is no chance to create a good will so it is unrealistic to realize the share premium (Bragg, 2007). The other accounting method is Purchase Accounting Method. This method records acquired asset on effective prices of assets. So if the premium is paid on the book value then good will value can be added in price and value of assets after acquisition (Tkachenko & Fiabedzi, 2001). Therefore, in this method it is important to depreciate the plant and equipment and amortize the good will of the merged entity. There exist major differences in both accounting methods of mergers. Different organizations make different choices from these accounting methods; therefore their performance evaluation outcome is also different (Hightower, 2008). In this study, the researcher analyzes that which accounting method is used by the GlaxoSmithKline, before and after the merger. By doing so, the researcher will become better able to conclude about the performance of M&A of GlaxoSmithKline.

As previously mentioned, accounting policies can also make a difference in evaluation of the merged firm’s performance. The next section interestingly discusses accounting policies and their impact on the disclosure of the firm’s performance. This is important to analyze the accounting policies used by firms, because accounting policies influence the reporting and disclosure of financial performance. As different accounting and financial measure are analyzed to investigate whether or not merger activity brings revenue as expected, therefore, it is important to understand to analyze the role of accounting policies to better understand the performance of firms.

2.2.15.Accounting Policies

Many times, managers use accounting discretion and policies to present an attractive financial position of the firm to investors with the help of biased accounting assumptions (Palepu et al, 2004). Even though, there are many accounting conventions that have aim to disclose only quality information to outside stakeholders. But still, managers are in position to influence the financial statements with the help of different accounting systems. The financial reporting strategy and policy of the firms can tremendously influence the financial position of the firm, in eyes of outside stakeholders. Managers always have techniques to use different disclosure policies in a way that makes it impossible for external users to have a true picture of financial condition of firms (Rankine, 2001). A good strategy is that makes sure to convince managers to portray the true business reality to all users of financial statements. The only justification that managers give for such manipulation is that by true disclosure, a business strategy can be revealed to competitors thus this can influence the competitive position of the firm in the mark. It is suggested by Robinson et al (2012), that managers should only give such information that is useful for investors.

There are many financial reporting policies that are used for manipulation of firms’ financial position. The accounting discretion that managers use, make financial statements so attractive that even knowledgeable investors cannot identify the poor performance of firms.

Financial Statement Analysis

Businesses represents the financial position of business with the help of financial statements, namely income statements, the balance sheet, cash flow statement and the statement of shareholder’s equity (Robinson et al, 2012). The major decisions of business are made on the basis of these financial statements and the basis aim of these statements is to present the financial performance of a particular company. These statements have many internal and external users. Along with internal users, external users also make decisions on the basis of data in these statements. As said by Fridson and Alvarez (2011), financial statements do not provide adequate information to take important decisions and these are also subject to biasness of finance experts who develop these statements. Therefore, it is critical to analyze these statements in a detailed and accurate manner.

With the help of a detailed financial statement analysis, it becomes easy to analyze and evaluate the performance of an organization with different perspectives (Wahlen et al, 2010). As said by Palepu et al (2004), investors and shareholders heavily rely on these financial statements before taking any decision regarding investing in a company. So with the help of financial statement analysis, the decision of investors and shareholders become more reliable and accurate. According to Fridson and Alvarez (2011), there are many tools to conduct the financial statement analysis and the most common are comparative financial statement analysis, common size financial statement analysis and ratio analysis. These most common techniques of financial statement analysis are used in this study. In this study, key financial indicators are used for evaluating the performance of the case organization namely GlaxoSmithKline.

2.2.16.Comparative Financial Statement Analysis

This analysis represents the direction of change in the organization for a particular period of time.  Basically, in comparative financial statement analysis, we examine the statements for consecutive years. Any change in these statements is recorded on the yearly basis (Shabbir & Abdullah, 2009). In this analysis, the most important thing is the trend that represents the performance of the firm for the particular period. The trend that is derived from this comparison can be used for evaluating the company’s performance in terms of its direction, speed and volatility. This analysis allows management and external users of financial statements to observe and identify the favorable and unfavorable trend of performance of the company. In this method, current year figures are compared with previous year figures. This analysis is also known as horizontal analysis. There are different techniques for this horizontal analysis like ratio comparative analysis, but in this study the researcher has used year-to-year comparative financial statement analysis. This method was selected because it provides detailed information in a clear and precise manner. Analysis of statements is done before and after the merger activity (Wahlen et al, 2010). For detailed analysis, it is recommended by Robinson et al (2012), to use at least 10 years for horizontal analysis, therefore the researcher has analyzed 13 years financial statements before and after the merger activity as well.

2.2.17.Ratio Analysis

According to Gitman (1999), the performance of an organization can be evaluated with the help of ratio analysis. This analysis focuses on four areas namely operating management, investment management, financing strategy and dividend policies. With the help of ratio analysis, the performance of a company can be compared for many years or with another company. The comparison of ratios on the yearly basis is known as time series comparison. The comparison on the basis of other companies is known as cross sectional comparison. As said by Smart and Megginson (2009), with time series analysis, it becomes easy to easy to determine and evaluate the strategies of a firm over a particular period of time. Cross sectional analysis allows firm to analyze its performance in relative to industry performance. In ratio analysis, usually there is no benchmark therefore it is hard to interpret the ratios. It is totally up to the analyst that how he/she aims to apply these ratios. It is critical to interpret ratios with care and responsibility, otherwise performance can be misrepresented. Alone, these ratios are not considered very significant because these are very difficult to interpret but when these ratios are compared with pre-determined standards, previous years or competitors’ ratios, analysis become meaningful.

 

 

Chapter Three

This chapter outlines the methods that are being used in this study. First of all, research process is explained. Then research philosophy, approach, strategy and time horizon are described. After this, the researcher has shed light on data collection techniques, data analysis plan and ethical issues of this research.

3.1. Research Process

This research follows the steps of the research process explained by Saunders et al (2007). Saunders has presented a process known as Saunders Onion and it starts with the selection of research philosophy. After this, as suggested by Saunders et al (2007) selection of research approach, research strategy, time horizon and data collection methods is done.

 

 

 

 

 

 

 

 

 

 

 

Figure 1: Research Process

(Source: Saunders et al. (2003))

3.2. Research Philosophy

The research philosophy is about certain assumptions and beliefs of the researcher regarding conduction of study. The possible options are phenomenological and positivistic philosophy (Bryman and Bell, 2007). In this research, positivistic philosophy is selected. As told by Collins (2010), positivistic studies are mostly based on numbers, figures and facts. Basically, the nature of study is experimental. As said by Cooper et al (2007), this philosophy prefers exploration of facts and causality. The use of this philosophy makes possible to complete the study in the most effective manner. The other philosophy, namely phenomenological paradigm is for those studies that aim to explore meanings of the certain research phenomenon (Blaxter et al, 2010). For this study, positivistic paradigm is more suitable because research aim can be fulfilled with this paradigm thus it is selected for this study.

3.3. Research Design

Research design explains the method that is used for completing the study (Cooper and Schindler, 2007). A research can either be conducted with inductive or deductive research design (Kumar, 2005). A new theory is developed in inductive research design and an already-made theory is assessed with the help of deductive research design (Greenfield, 1996). This research is based on deductive research approach. This research aims to explore the issues related to the growth of mergers and acquisitions and as suggested by Ramamurthy, (2011) this is done by considering available literature on mergers and acquisitions and quantitative data is used for examining the research issue. 

3.4. Research Strategy

Every research uses the particular research strategy that helps the researcher to complete the study in a meaningful study. There are many research strategies from which researcher can select one or combination of more than one. In this research, case study and field survey is selected. To analyze complex research issues, it is recommended by Stake (1995) to use the case study method. This method allows analyzing the research issue with the examination of a real life scenario. According to Kumar (2005), survey strategy is good for increasing the generalizibility of research. For this study, the combination of case study and survey strategy is used. In this study, a case organization named GlaxoSmithKline is selected.

3.5. Time Horizon

The time outlines that how many time data for the study is collected. There are two options for the time horizon, namely cross-sectional and longitudinal. Basically, longitudinal studies collect data more than once from the sample. On the other hand, cross-sectional gathers data only one time (Saunders et al, 2003). This study uses the cross-sectional time horizon and data will be collected only one time. The nature of study is like that cross-sectional horizon is appropriate and there is no issue in using this time horizon. Along with this, research can be completed on time with this method. Therefore, to complete this dissertation on time and with fewer resources, cross-sectional time horizon is used.

3.6. Research Methods

A study can either be qualitative or quantitative. The studies that are based on numbers and figures, basically, use quantitative research methods. Conversely, for exploration of qualitative research issues, qualitative research methods are preferred (Creswell, 2009). The quantitative methods enhance the generalizability of results of study and such studies are easy to interpret as well (Saunders et al, 2007). The reliability and validity of quantitative studies is high (Sekaran and Bougie, 2010). Considering objectives and aim of this study, quantitative research methods are selected.

3.7. Data Collection Methods

According to Ramamurthy (2011), there are two possible data collection methods, namely primary and secondary. The secondary data collection method is to use data that are already gathered by some other researcher for some other purpose. According to Sapsford (2007), the secondary data sources are statistical reports, financial reports, books, journals, official websites and online links. The secondary data is always used because it is better for getting detail insight of the issue. This approach allows collecting data with minimum time and cost. If the secondary data is collected from trusted and authentic sources, data can also be declared to have good reliability and validity (Maanen, 1979). The primary data collection is to collect data at the first time. The use of primary data is good for getting insight into the research issue with the help of fresh data. Whenever, secondary data is not sufficient researchers should use the primary or combination of both primary and secondary data for conducting a meaningful study (Greenfield, 1996). In this study, both primary and secondary data are used. Secondary data is collected through financial reports and primary data is collected with the survey. The use of both studies makes the findings unique, meaningful and useful.

3.8. Research Instrument

The researcher aims to conduct the pre and post merger analysis. This research is based on both primary and secondary data analysis. As already mentioned that primary data is collected through the survey and secondary data is collected through annual reports of GlaxoSmith Kline, GlaxoWellcome (GW) and SmithKline Beecham (SKB) is used. For this secondary data, different performance indicators, namely sales and net earnings growth, revenue and the operating expense ratio, along with ration analysis is conducted. For primary data, the questionnaire is used as a research instrument. Researcher selected the questionnaire because with this instrument data can be collected easily and interpretation can also be done, effectively (Sapsford, 2007). The questionnaire has two sections. The first section is about demographic variables and the other section discusses the issues related to growth of mergers and acquisition. It is enclosed in appendix.

3.9. Inclusion Criteria of Sample

In this study, both primary and secondary data is used and data is collected on the basis of certain criteria. The financial statement of GlaxoWellcome and SmithKline Beecham are used for year 1997, 1998 and 1999. For GlaxoSmithKline financial statements of year 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008 and 2009 are consulted. For primary data collection, non-probability sampling is used. By using the purposive sampling method, those managers were selected as samples that are knowledgeable about the research issue. In this study, a sample of 50 respondents from management of GlaxoSmithKline is selected.

3.10. Data Analysis

This research uses the descriptive analysis, and results are presented with the help of charts, graphs and tables. The researcher used the Microsoft Office Excel 2007 as a tool for doing the analysis. For the survey, firstly demographic analysis is done then analysis of main variables is conducted. Analysis of financial statements is done with a method named common size financial statement analysis. Ratio analysis is done with sales and net earnings growth, revenue and the operating expense ratio, share price and dividend analysis.

3.11. Research Ethics

It is necessary for a research to consider all ethical issues that are faced during the research (Sekaran, 2003). In this study, researcher faced few ethical issues and all of them have been duly considered to complete the study in an effective manner. First of all, it is important to take care of the privacy of respondents, so the researcher ensured that identity is kept completely confidential. Only those participants were selected for filling the questionnaire who were willing to be part of this study. The researcher did not enforce anyone to fill the questionnaire. For this, a consent form was got signed from the all respondents. Along with this, it was also ensured to inform respondents about aims and objectives of the study. Therefore, the consent form of the questionnaire also mentioned the aim and objectives of the study. For secondary data, it was made sure to not to manipulate the data of the financial reports. It was also ensured that all data that are collected through books, journals and online links are properly referenced.

 

 

Chapter 4 - Findings and Analysis

This is the most important section of the dissertation. This chapter starts with the historical background of case organizations. After laying the foundation of this chapter, financial analysis starts. Firstly, analysis is completed through key performance indicators of Glaxo Wellcome and SmithKline Beecham. Then ratio analysis is conducted. After financial analysis, survey results are described. Firstly, descriptive analysis is completed for the demographic variables. Then descriptive analysis is done for the main variables of the current study.

4.1. Historical Background of GlaxoSmithKline

GlaxoWellcome came into existence with the merger of Glaxo and Wellcome in 1995. Basically, it was Glaxo that acquired the Wellcome with £9 billion. Glaco started as a family business in 1873 and its main product was milk powder. When a pharmaceutical expert Harry Jephcott joined the Glaxo, it started to enter into pharmaceutical industry and pharmaceutical products became its main products. From that time, Glaxo continued to expand globally with its pharmaceutical products and acquire and merged with many related organizations like Allen and Hanbury Ltd and Meyer Laboratories. On the other hand, Wellcome was started by Henry Wellcome and Silas Burroughs. Even though it was a partnership based business, but the success of business was dedicated to Wellcome’s experience, skills and expertise. Wellcome had also the history of mergers and acquisitions where it acquired Cooper, McDougall and Robertson Ltd; it launched many new pharmaceutical solutions and expanded in various countries. It was quite successful and highly profitable until 1970’s. After this, in 1995, it took the decision to merge with Glaxo. Thus, the merger between Glaxo and Wellcome occurred and now these both organizations were known as Glaxo Wellcome.

After this merger, GlaxoWellcome (GW) acquired Affymax that was a California based leader in the field of combinational chemistry. The major products of GlaxoWellcome were Serevant & Ventoline, Becotide/Beclovent, Combivir, Ziagen, Zeffix, Zovirax, Rlenze, Imigran/Imitrex, Zinnat, Fortym, Zinacef, Zantac, Zofran, Betnovate, Dermovate and Cutivate. The business of GW has many subsidiaries in various countries offering prescribed and non-prescribed medicines. Before the merger with SmithKline, its principle facilities were located in UK and it had operations in 57 countries while manufacturing was done in 33 countries. The products were sold in approximately 157 countries. This company was listed in London and New York stock exchanges.

The other organization named SmithKline Beecham came into existence with the merger of SmithKline and Beecham group Plc. It dealt in the market of consumer health care and pharmaceutical market. It used to offer pharmaceutical products under the category of anti-infective, cardiovascular inflammation and Tissue repair and oncology, metabolism and pulmonary, neurosciences, and vaccines. Under consumer health care category, it offered products for analgesics, dermatological, gastrointestinal, gastrointestinal, nutritional, oral health care, the respiratory tract, smoking cessation and vitamins and tonics.

On January 17, 2000, merger of GlaxoWellcome and SmithKline was announced. Now, the both companies were having the value of £114 billion making GlaxoSmithKline a giant in world pharmaceutical industry. The annual reports of 1999 declared this merger and showed the hope of future growth to its shareholders. The share capital was given to the shareholders of both organizations with the ratio of 58.75% for GlaxoWellcome and 41.25% for SmithKline shareholders. The motive behind this merge was to improve product portfolio and to solve patent problems. Both organizations also wanted to get benefits of synergy and cost savings. Other motives were to have more budgets for research and development and deal with the intense competition of the market.

4.2. Role of Accounting Policy

Like other things, it is also critical to investigate and analyze that which accounting policies are being used by firms to disclose information for investors, the shareholders and other stakeholders. With the help of different accounting policies and accounting discretion, it becomes easy for managers to get insight into the financial statements. The investors only analyze the profit of a firm to make any decision. A study conducted by Mehmood (2009), has revealed that the impact of account policy was observed only in year 2000 on financial statements of GlaxoSmithKline. Therefore, any drastic change in year 2000 in financial performance can be dedicated to the change in accounting policy.  

4.3. Financial Analysis

In this section financial performance of merged companies is analyzed using key performance indicators. Key performance indicators are useful for presenting a clear picture of merged company. For detailed analysis after the merger, ten years after merger activity are analyzed. Before the merger, only three years data is considered. Trend of financial performance is analyzed using data of ten years after merger. Through this analysis, a long term perspective of growth with mergers is analyzed. The comparison of post and pre merger financial performance is conducted to assess corporate growth after merger. The absolute change of pre merged companies is considered as one company. Importantly, this analysis does not include any external changes into considerations.  Only factors that are related to the financial and operational growth are under study in this research.

Following key performance indicators will evaluate the performance of GlaxoSmithKline.

4.2.1. Sales Growth

Table 1: Sales Growth

Year	Glaxo Wellcome (amount in £Millions)	SmithKline Beecham (amount in £Millions)	GlaxoSmithKline (amount in £Millions)	Percentage Change in sales
1997	7,980	7,795	15,775	-------------
1998	7,983	8,082	16,065	1.83835182
1999	8,490	8,381	16,871	5.01711796
2000			18,079	7.16021575
2001			20,489	13.3303833
2002			21,212	3.52872273
2003			21,441	1.0795776
2004			20,359	-5.04640642
2005			21,660	6.39029422
2006			23,225	7.22530009
2007			22,716	-2.19160388
2008			24,352	7.20197218
2009			28,368	16.4914586

Source: Developed by Researcher using Financial Data (2014)

Figure 2: Comparison of Sales – Pre & Post Merger

 

Source: Developed by Researcher using Financial Data (2014)

From the above calculations, it is obvious that sales of merged companies are growing. Only in 2004 and 2007, GlaxoSmithKline has faced decline in sales. For other years, a remarkable increase in sales of the organization is observable. In the early years of mergers, only a slight increase in sales was observed. As the outcome cannot be observed within three to four years, the increasing trend of sales from 2004 onwards portrays that merger is quite successful in terms of increasing sales objective. 

4.2.2. Net Earnings Growth

Table 2: Net Earnings Growth

Year	Glaxo Wellcome (amount in £Millions)	SmithKline Beecham (amount in £Millions)	GlaxoSmithKline (amount in £Millions)	Percentage Change in Net Earnings Growth
1997	1850	1079	2929	--------------
1998	1836	606	2442	-16.626835
1999	1811	1053	2864	17.2809173
2000			4154	45.0418994
2001			3059	-26.360135
2002			3915	27.983001
2003			4484	14.5338442
2004			4302	-4.058876
2005			4689	8.9958159
2006			5389	14.9285562
2007			5214	-3.2473557
2008			4602	-11.737629
2009			5531	20.1868753

Source: Developed by Researcher using Financial Data (2014)

Figure 3: Comparison of Net Earnings – Pre and Post Merger

 

Source: Developed by Researcher using Financial Data (2014)

Before the merger, the condition of both organizations was showing the red flag. Net earnings were showing the declining trend. From 2000 to 2009, the merged company has observed 62.54% changes in net earnings. This shows that increase in net earnings performance objective has also increased.

4.2.3. Research and Development

Table 3: Research and Development Analysis – Pre & Post Merger

Year	Glaxo Wellcome (amount in £Millions)	SmithKline Beecham (amount in £Millions)	GlaxoSmithKline (amount in £Millions)	Percentage Change in Research and Development
1997	1148	841	1989	-----------
1998	1163	910	2073	4.22322775
1999	1269	1018	2287	10.3232031
2000			2526	10.4503717
2001			2651	4.94853523
2002			2900	9.39268201
2003			2791	-3.75862069
2004			2839	1.71981369
2005			3136	10.4614301
2006			3457	10.2359694
2007			3327	-3.76048597
2008			3681	10.6402164
2009			4106	11.545775645

Source: Developed by Researcher using Financial Data (2014)

 

 

 

 

 

 

 

Figure 4: Research and Development Analysis – Pre & Post Merger

 

Source: Developed by Researcher using Financial Data (2014)

Research and development activities are quite critical for pharmaceutical organizations. The success of pharmaceutical companies is heavily dependent on this activity. Future profits and shareholder’s value is generated with this activity. One of the motives of mergers was to have a strong research and development. Both organizations were doing well in research and development activities even before the merger. In 1999, GW invested a high amount in R&D and hired 1000 new employees. Same was observed for SKB as new technology was integrated for human health care. Both companies wanted to merge because they want to get maximum benefit from combined research and development facilities. The increasing trend is showing that work in this area improved. After merger, the company became better able to open up new research and development facilities different parts of the world. According to Sir Richard Skyes who is the chairman of GlaxoSmithKline mentioned that if we are merging then one of the most important reasons is that we can utilize combined money and effort for better research and development facilities. This will not only be beneficial for company, but for the whole industry. Thus, the increase in sales can also be dedicated to this activity of the GlaxoSmithKline. The increasing trend of research and development investment has clearly showed that another objective of merger is fulfilled.

4.2.4. The Relationship of Operating expense and Revenue Generation

Table 4: Relationship between operating expenses and revenue – pre & post merger

Year	GlaxoWellcome		SmithKline Beecham		GlaxoSmithKline		GlaxoSmithKline
	Operating expense	Revenue	Operating expense	Revenue	Operating Expense	Revenue	Operating expense	Revenue
1997	3748	7980	3739	7795	7523	15775	-----------	------------
1998	3851	7983	4032	8082	7883	16065	4.785325	1.83835182
1999	4260	8490	4220	8381	8480	16871	7.57325891	5.01711796
2000					9662	18079	13.9386792	7.16021575
2001					11055	20489	14.41730	13.33038
2002					10941	21212	-1.03120	3.528722
2003					10372	20359	-5.200621	-4.021308
2004					9900	20359	-4.550713	0
2005					10386	21660	4.909090	6.390294
2006					10714	23225	3.158097	7.225300
2007					10281	22716	-4.041441	-2.191603
2008					11337	24352	10.271374	7.2019721
2009					13698	24368	20.82561	0.065703

Source: Developed by Researcher using Financial Data (2014)

Figure 5: Relationship between operating expenses and revenue – pre & post merger

 

Source: Developed by Researcher using Financial Data (2014)

From the above table and figure, it is clear that both revenues and expenses are increasing. To find the relationship between operating expenses and revenue, percentage change in both items is found. The results are mixed. Sometimes, operating expenses are increasing and sometimes revenue generation is increasing with greater ratio. In initial years after merger, the revenue ratio was less than the operating expense change. This was because of the merger activity. After four to five years, trend has changed and till 2009, in most of the years change in revenue is greater than the change in expenses. It should not be ignored that after merger spending on research and development has increased. Most of the time the result of research and development activities is shown after many years, so this can also be dedicated to increased research and development activities. Overall, it can be concluded that GlaxoSmithKline is effectively and efficiently utilizing its resources for revenue generation.

4.3. Financial Ratios

4.3.1. Current Ratio

According to Gilson and Black (1995), this ratio outlines the ability of a company to pay backs its short term liabilities with its current assets. Short term liabilities include short term debts and payables and current assets include cash, inventory and receivables. The higher the ratio, company is better able to pay back its short term liabilities. It is calculated through the following formula:

Current Ratio = Current Assets/Current Liabilities

Table 5: Current Ratios – Pre & Post Merger

Year	Current Ratio= Current Assets/Current Liabilities
	GW	SKB
1997 (Before Merger)	1.236	0.971
1998 (Before Merger)	1.329	1.067
1999 (Before Merger)	1.155	1.058
2000 (After Merger)	1.240
2001 (After Merger)	1.060
2002(After Merger)	1.220
2003 (After Merger)	1.469
2004(After Merger)	1.563
2005(After Merger)	1.385
2006(After Merger)	1.513
2007(After Merger)	1.317
2008(After Merger)	1.724
2009(After Merger)	1.450

Source: Developed by Researcher using Financial Data (2014)

Figure 6: Current Ratios – Pre & Post Merger

 

Source: Developed by Researcher using Financial Data (2014)

The standard for this ratio is usually 2.0, but for the certain pharmaceutical industry ratio above 1 is acceptable (Fridson and Alvarez, 2011).  Before the merger, the repaying ability of both companies was less, this shows that they are having more liabilities and current assets were slightly more than the liabilities. After merger, the condition has become better. For initial years, it was not very high but in next year’s current ratios has started to improve and has become stable. The improvement and stability in the current ratio is a positive sign. This shows that financial performance is becoming better.

4.3.2. Quick Ratio

As told by Fridson and Alvarez (2011), this ratio is bit similar to the current ratio and also measures the ability of a firm to deal with its short term liabilities. The drawback of the current ratio can be avoided and it only considers those assets that can be quickly liquidated. It does not include inventory in current assets. The formula for the quick ratio is;

Quick Ratio = Current Assets – Inventory / Current Liabilities

Table 6: Quick Ratios – Pre & Post Merger

Year	Quick Ratio = Current Assets – Inventory / Current Liabilities
	GW	SKB
1997 (Before Merger)	1.02	0.79
1998 (Before Merger)	1.05	0.85
1999 (Before Merger)	0.86	0.84
2000 (After Merger)	0.99
2001 (After Merger)	0.84
2002(After Merger)	0.98
2003 (After Merger)	1.22
2004(After Merger)	1.31
2005(After Merger)	1.16
2006(After Merger)	1.18
2007(After Merger)	1.02
2008(After Merger)	1.32
2009(After Merger)	1.11

Source: Developed by Researcher using Financial Data (2014)

Figure 7: Quick Ratios – Pre & Post Merger

 

Source: Developed by Researcher using Financial Data (2014)

The above figure and the table shows the quick ratio for GW, SKB and GSK. Before merger, the performance of GW was better in terms of repaying its short term liabilities by using most liquid current assets. The financial statements of GW show that better condition of GW was because of equity investment in the business. Overall, trend shows that the ability of GSK has improved in terms of paying back its short term obligations. The balanced and encouraging trend of the quick ratio of GSK proves that mergers objectives are successfully achieved.

4.3.3. Debt Ratio

In words of Gitman (1999), this ratio evaluates the ratio of debt that a firm has taken with reference to its assets. Basically, the debt ratio tells about the potential risk that a company might have to face because of its extra load of debt. This ratio assesses the long term solvency of the firm. This measure tells about the long term condition of the firm. The formula for calculating the debt ratio is given below.

Debt Ratio = Total Debt / Total Assets

The below table and figure explains the long term solvency of the GW, SKB and GSK in pre-merger and post-merger era.

Table 7: Debt Ratio – Pre & Post Merger Analysis

Year	Debt Ratio
	GW	SKB
1997 (Before Merger)	0.78	0.66
1998 (Before Merger)	0.70	0.69
1999 (Before Merger)	0.69	0.60
2000 (After Merger)	0.59
2001 (After Merger)	0.62
2002(After Merger)	0.67
2003 (After Merger)	0.65
2004(After Merger)	0.73
2005(After Merger)	0.72
2006(After Merger)	0.65
2007(After Merger)	0.68
2008(After Merger)	0.79
2009(After Merger)	0.75

Source: Developed by Researcher using Financial Data (2014)

The standard debt ratio is the 1. The debt ratio of 1 depicts that there are more assets than debts in the financial structure of an organization. Lower the debt ratio is, the better the organization is, because now there are more assets to pay its debts. But this lower debt ratio also depicts that there is less finance available to be invested in the operations of business.

Figure 8: Debt Ratio - Pre & Post Merger Analysis

 

Source: Developed by Researcher using Financial Data (2014)

The trend from above figure shows that the debt ratio was stable even before the merger and it remained stable even after the merger of the GW and SKB into GSK. This is a favorable situation showing that there are more assets with GlaxoSmithKline to pay off its debts. Through the debt ratio, good performance of GSK is observable. 

4.3.4. Debt to Equity Ratio

According to Robinson et al, (2012), debt to equity ratio is a useful measure that basically describes the proportion of liabilities with the shareholders’ equity. This measure tells that how much financing is done with equity and how much financing is done with debt. A higher debt to equity ratio portrays the violate earnings because the firm must have to deal with higher interest expense now. On the other hand, the higher debt ratio also tells that company is in position to generate more revenue with the help of financing that it has obtained through debts. Sometimes, higher debt may cause more revenue generation and sometimes it causes higher expenses. Below table describes the debt to equity ratio for GSK pre and post merger activity.

Table 8: Debt to Equity Ratio: Pre & Post Merger Analysis

Year	Debt to Equity Ratio = Debt / Shareholder’ Equity
	GW	SKB
1997 (Before Merger)	3.55	3.24
1998 (Before Merger)	2.43	3.56
1999 (Before Merger)	2.30	2.22
2000 (After Merger)	1.63
2001 (After Merger)	1.80
2002(After Merger)	2.27
2003 (After Merger)	2.00
2004(After Merger)	2.76
2005(After Merger)	2.68
2006(After Merger)	2.77
2007(After Merger)	2.19
2008(After Merger)	3.91
2009(After Merger)	3.21

Source: Developed by Researcher using Financial Data (2014)

Figure 9: Debt to Equity Ratio - Pre & Post Merger Analysis

 

Source: Developed by Researcher using Financial Data (2014)

Comparison of SKB and GW debt to equity ratio shows that SKB has stable debt to equity ratio. While the situation of GW was fluctuating because it introduced a new product line in 1997, therefore situation was stable. On the other hand, after the merger this ratio decline and for few years it remained in 1.63 to 2.87. From 2004, an increasing trend is observed which shows that debt was higher than equity. In 2007, the ratio decreased because now more shares were at ESOP trust. After this year, it started to increase again. This continues increase in this ratio is because of the buyback program announced in 2006.

4.3.5. Return on Equity Ratio

As mentioned by Smart and Megginson (2009), this ratio describes the return given to the shareholders on the basis of their equity portion in an organization. This is a quite critical ratio to determine the success through profitability of the organization that is distributed in shareholders. This measure is also useful for potential investors because they make future investment decisions on the basis of this ratio. This ratio is calculated through the following formula.

Return on Equity Ratio = Net Income / Shareholder’s Equity

In the following table, calculated return on equity ratio through the above-mentioned formula is presented.

Table 9: Return on Equity Ratio - Pre & Post Merger Analysis

Year	Return on Equity Ratio = Net Income / Shareholder’s Equity
	GW	SKB
1997 (Before Merger)	1.00	0.60
1998 (Before Merger)	0.68	0.35
1999 (Before Merger)	0.58	0.45
2000 (After Merger)	0.54
2001 (After Merger)	0.41
2002(After Merger)	0.59
2003 (After Merger)	0.58
2004(After Merger)	0.73
2005(After Merger)	0.64
2006(After Merger)	0.57
2007(After Merger)	0.54
2008(After Merger)	0.58
2009(After Merger)	0.55

Source: Developed by Researcher using Financial Data (2014)

Figure 10: Return on Equity Ratio - Pre & Post Merger Analysis

 

Source: Developed by Researcher using Financial Data (2014)

It can be seen from above graph and table that Return on Equity was not stable in the period before the merger. Dominantly, the ratio of GW was declining. The shareholders of SKB were receiving less but stable returns on their investments. After merging, the return on equity has become stable. The return on equity ranged from 0.41 to 0.73. The balanced return on equity ratio is a positive sign and it can be concluded that merger activity has proved successful for shareholders.

4.3.6. Return on Assets Ratio

According to Smart and Megginson (2009), this ratio evaluates the profitability of a company with reference to its available total assets. Basically, this ratio tells that how effectively an organization is utilizing its assets for betterment of organization. The following formula is used for its calculations.

Return on Assets = Net Income / Total Assets

This ratio is also a good indicator of a company’s financial performance. The following table represents the calculated return on assets for GW, SKB and GSK.

Table 10: Return on Assets Ratio - Pre & Post Merger Analysis

Year	Return on Assets Ratio = Net Income / Total Assets
	GW	SKB
1997 (Before Merger)	0.22	0.13
1998 (Before Merger)	0.20	0.07
1999 (Before Merger)	0.17	0.12
2000 (After Merger)	0.19
2001 (After Merger)	0.14
2002(After Merger)	0.18
2003 (After Merger)	0.19
2004(After Merger)	0.19
2005(After Merger)	0.17
2006(After Merger)	0.21
2007(After Merger)	0.17
2008(After Merger)	0.12
2009(After Merger)	0.13

Source: Developed by Researcher using Financial Data (2014)

 

 

Figure 11: Return on Assets Ratio - Pre & Post Merger Analysis

 

Source: Developed by Researcher using Financial Data (2014)

It is obvious from the above figure and table that return on assets were not stable before the merger activity. After the merger, slight fluctuations have observed, but the main reason of these fluctuations was nothing else, but increased investment in fixed assets by the GSK. For sure, this increased investment in fixed assets will prove beneficial for organization in coming years.

4.3.7. Gross Profit Margin

As told by Watts (1996), this ratio evaluates that how effectively revenues are generated by using the direct costs associated with every unit sales. This measure is also a good indicator of the financial performance of a company. It is calculated by subtracting the cost of goods sold from sales and dividing the figure with sales.  

Gross Profit Margin = Sales – Cost of Goods Sold / Sales

Table 11: Gross Profit Margin - Pre & Post Merger Analysis

Year	Gross Profit Margin Sales – Cost of Goods Sold / Sales
	GW	SKB
1997 (Before Merger)	0.82	0.70
1998 (Before Merger)	0.81	0.70
1999 (Before Merger)	0.78	0.71
2000 (After Merger)	0.78
2001 (After Merger)	0.77
2002(After Merger)	0.78
2003 (After Merger)	0.79
2004(After Merger)	0.79
2005(After Merger)	0.78
2006(After Merger)	0.78
2007(After Merger)	0.77
2008(After Merger)	0.76
2009(After Merger)	0.74

Source: Developed by Researcher using Financial Data (2014)

Figure 12: Gross Profit Margin Ratio - Pre & Post Merger Analysis

 

Source: Developed by Researcher using Financial Data (2014)

Both companies had stable gross profit margins before the merger activity. The comparison also shows that GW had the higher revenue therefore its net profit margin were also higher than SKB. When both firms combined, the range of gross profit margin remained 0.74 to 0.78 in 2000-2009. The maximum gross profit margin was observed in 2003, 2004 and 2005. Overall results of this ratio are also encouraging after the merger activity.

4.4. Survey Results

4.4.1. Demographic Analysis

This section describes the age and management level of respondents of this study.

Table 12: Age Statistics of Respondents

Possible Options	Frequency of Respondents
Below 25 years	6
25-35 years	25
36-45 years	14
Above 45 years	5

Source: Developed by Researcher from Survey Data (2014)

Figure 13: Age Statistics of Respondents

 

Source: Developed by Researcher from Survey Data (2014)

The results of the survey showed that the majority of respondents were of age group 25-35 years. There 50% respondents from the age group of 25-35 years. There were 12% respondents from below 25 years age group. There were 10% respondents from age group of above 45 years and only 28% were from 26-45 years.

Table 13: Management Level of Respondents

Possible Options	Frequency of Respondents
Upper Level Management	14
Middle Level Management	16
Lower Level Management	20

Source: Developed by Researcher from Survey Data (2014)

Figure 14: Management Level of Respondents

 

Source: Developed by Researcher from Survey Data (2014)

This question was asked to investigate the level of management of the respondents of this study. The majority of respondents were from lower management. There were 28% respondents who were from upper management, 32% were from middle management and 40% were from lower management level.

4.4.2. Analysis Main Variable of Questionnaire

Statement: Merger activity between GlaxoWellcome and SmithKline Beecham was a wise decision?

Table 14: Merger – A wise decision or not

Possible Options	Frequency of Respondents	Percentage
Strongly Agree	10	20%
Agree	25	50%
Neutral	3	6%
Disagree	2	4%
Strongly Disagree	10	20%

Source: Developed by Researcher from Survey Data (2014)

 

Figure 15: Merger – A wise decision or not

 

Source: Developed by Researcher from Survey Data (2014)

This question was asked to investigate the opinion of management of GlaxoSmithKline regarding whether or not the merger was a wise decision. The result showed that majority of managers of GlaxoSmithKline views this merger as a wise decision. There were 20% respondents who said that they strong agree, 50% said that they agree, 6% said that they are neutral. On the other hand, a very small percentage of respondents i.e. 4% disagree with this statement. Likewise, 20% respondents strongly disagree. From this item response, it can be said that merger was a wise decision.

Statement:

The merger between GlaxoWellcome and SmithKline Beecham proved has successfully proved for the revenue generation for the organization

Table 15: Revenue Generation through Merger and Acquisition 

Possible Options	Frequency of Respondents	Percentage
Strongly Agree	15	30%
Agree	20	40%
Neutral	5	10%
Disagree	3	6%
Strongly Disagree	7	14%

Source: Developed by Researcher from Survey Data (2014)

Figure 16: Revenue Generation through Merger and Acquisition 

 

Source: Developed by Researcher from Survey Data (2014)

This question was asked to investigate the success of merger in terms of revenue generation. The results of the survey showed that the majority of respondents consider this merger positive for the revenue generation. There were 30% respondents who stated that they strongly agree with this statement. Similarly, a large percentage, i.e. 40%, agrees with this statement. There were 10% respondents who responded that they are neutral. Conversely, 14% and 6% participants stated that they strongly disagree and disagree, respectively. Thus, it can be said that the merger is achieving growth objectives.

Statement:

The merger between GlaxoWellcome and SmithKline Beecham has proved useful delivering superior value to shareholders.

Table 16: Value Creation for Shareholders through Merger

Possible Options	Frequency of Respondents	Percentage
Strongly Agree	12	24%
Agree	22	44%
Neutral	6	12%
Disagree	3	6%
Strongly Disagree	7	14%

Source: Developed by Researcher from Survey Data (2014)

Figure 17: Value Creation for Shareholders through Merger

 

Source: Developed by Researcher from Survey Data (2014)

This item of the questionnaire was included to determine the success of mergers in terms of shareholders’ value creation. There were 24% managers of GlaxoSmithKline who agree that this merger is bringing value for shareholder. There were 44% respondents who agree with this. 12% respondents are neutral. On the other hand, a very small percentage i.e. 6% and 14% of respondents disagree and strongly disagree, correspondingly.  Thus, on the basis of this item, it can be said that merger is useful for the value creation process.

Statement:

The merger between GlaxoWellcome and SmithKline Beecham has successfully its objectives of synergy, cost reduction, solve patent problems and improve product portfolio.

Table 17: Successful achievement of Objectives of Merger

Possible Options	Frequency of Respondents	Percentage
Strongly Agree	8	16%
Agree	28	56%
Neutral	4	8%
Disagree	7	14%
Strongly Disagree	3	6%

Source: Developed by Researcher from Survey Data (2014)

Figure 18: Successful achievement of Objectives of Merger

 

Source: Developed by Researcher from Survey Data (2014)

As literature has identified that it is not possible to successfully achieve the merger growth objective. The purpose of this item was to determine the level of achievement of growth objectives. The results of the survey showed that the majority of respondents agree and strongly agree with the statement that objectives have achieved. There were 16% and 56% respondents who clearly stated that they strongly agree and agree with this. There were 8% respondents who are neutral. On the other hand, very few managers i.e. 14% and 6% disagree and strongly disagree. Thus, it is concluded from this survey that objectives of the merger between GlaxoWellcome and SmithKline Beecham has effectively achieved.

Statement:

All factors that can cause failure were properly managed therefore this merger has become a success.

Table 18: Effective Management of factors leading to failure

Possible Choices	Frequency of Respondents	Percentage
Strongly Agree	21	42
Agree	12	24
Neutral	4	8
Disagree	3	6
Strongly Disagree	10	20

Source: Developed by Researcher from Survey Data (2014)

Figure 19: Effective Management of factors leading to failure

 

Source: Developed by Researcher from Survey Data (2014)

This item was asked to investigate whether GlaxoSmithKline effectively managed those factors that cause failure or not. The majority of responses said effective management of those factors is done. There were 42% respondents who strongly agreed, 24% agreed with the statement. There were 8% respondents who remained neutral for this statement. There were 6% and 20% respondents who said that they disagree and strongly disagree, respectively.

Chapter 5: Conclusion, Limitations and Future Research Directions

5.1. Conclusion

Mergers and Acquisition has been the focus of many researchers from last few years because of many debatable issues related to Merger and Acquisition. In last two decades, there has occurred a large number of merger and acquisition activity. Corporate executives believe that this is a useful tool for achieving objectives of corporate growth with the help of synergies. In the last few decades, many mergers have observed in pharmaceutical companies. There are various reasons of these mergers and acquisitions.  The most famous motivations are to gain competitive advantage and to have increased market share, expanded product line, improved financial strengths, the establishment of seasonal businesses, access to technical talent and to increase value and efficiency of resources. Even though, there are many advantages of mergers and acquisition. There was still confusion regarding whether growth objectives of merger are fulfilled or not. Therefore, aims to understand and analyze the growth issues in the merger activity.  This aim is fulfilled with certain objectives. Literature identifies several causes of the failure of mergers and acquisitions. The most common cause of failure is ineffectiveness in talent management and cultural difference management, integration planning, knowledge, over estimation of synergy, paying more for less and lack of customer focus. This study is conducted to analyze whether the growth objectives of merger are successfully achieved or not. For this, it uses the quantitative research methods and this is based on financial analysis of merged firms. The results are found on the basis of primary and secondary data. Financial analysis is done with secondary data while descriptive analysis of the survey is done with primary data. The results of pre and post merger activity showed that key performance indicators have improved after merger. Similarly, post and pre merger ratio analysis declares that merger between GlaxoWellcome and SmithKline Beecham was quite successful. Overall, more or less, the figures of the current ratio, quick ratio, debt ratio, debt to equity ratio, return on equity ratio, return on assets ratio and gross profit margin has improved and has become stable after merger. Similarly, survey results are also encouraging where managers believe that there were no issues in growth of organization with merger and merger activity has remained quite successful.

5.2. Fulfillment of Objectives

The aim of the study was to understand and analyze the growth issues in the merger activity.  This aim was to be fulfilled through certain objectives. The first objective was to review literature on issues related to the merger and acquisition. This objective is effectively fulfilled in the second chapter of the dissertation. The other objectives of the research were to investigate the usefulness of merger activity for growth of merged organization, to investigate whether merger activity delivers value for merged organization and to investigate whether merger activity brings revenue as expected. These objectives are fulfilled through financial analysis of the GlaxoSmithKline. The last objective of this research was to conduct a survey of management at GlaxoSmithKline (GSK) to investigate the impact of the merger on corporate growth objectives. This objective has also fulfilled through conducting a survey.

5.3. Limitations of Research and Future Research Directions

Like all studies, there are certain limitations that this research faces. First of all, it is based on quantitative data analysis, only. For exploration of issues related to growth objectives of mergers, a qualitative analysis would be more desirable. As qualitative analysis is more complex and demands more time, therefore, that is not conducted in this study. This study is based on the case study of the GlaxoSmithKline only, thus it cannot be generalized to all organizations. The survey conducted for this study relies on a very small sample size that also decreases the generalizibility. It is recommended to future researchers to use the qualitative analysis. With qualitative analysis, these issues will be explored in an effective manner. For future studies, it is also recommended to conduct a study that considers more organizations and does not rely on one organization as this study does. Future studies must use a large sample size for the survey.

 

 

 

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Appendix

Questionnaire

What is your age?

1. Below 25
2. 25-35 years
3. 36-45 years
4. Above 45 years

What is your management level?

1. Upper Level Management
2. Middle Level Management
3. Lower Level Management

Please select the most appropriate choice according to your level of agreement with the statement.

Merger activity between GlaxoWellcome and SmithKline Beecham was a wise decision?

Strongly Agree                        Agree              Neutral                        Disagree                      Strongly Disagree

The merger between GlaxoWellcome and SmithKline Beecham proved has successfully proved for revenue generation for the organization

Strongly Agree                        Agree              Neutral                        Disagree                      Strongly Disagree

The merger between GlaxoWellcome and SmithKline Beecham has proved useful delivering superior value to shareholders.

Strongly Agree                        Agree              Neutral                        Disagree                      Strongly Disagree

The merger between GlaxoWellcome and SmithKline Beecham has successfully its objectives of synergy, cost reduction, solve patent problems and improve product portfolio.

Strongly Agree                        Agree              Neutral                        Disagree                      Strongly Disagree

All factors that can cause failure were properly managed therefore this merger has become a success.

Strongly Agree                        Agree              Neutral                        Disagree                      Strongly Disagree