Impact on Shareholders Wealth in M&A Episode



The Indian economy has undergone a major transformation and structural change during the past decade or so as a result of economic reforms introduced by the Government of India since 1991 in the wake of policy of economic liberalization and globalization. In this liberalized era, size and "core competence" have become the focus of every business enterprise. Naturally, this requires companies to grow and expand in businesses that they understand well. Thus, leading corporate houses have undertaken a massive restructuring exercise to create a formidable presence in their core areas of interest. Mergers and acquisitions (M&As) is one of the most effective methods of corporate restructuring and has, therefore, become an integral part of the long-term business strategy of corporate.

The M&A activity has its impact on various diverse groups such as corporate management, shareholders and investors, investment bankers, regulators, stock markets, customers, government and taxation authorities, and society at large. Therefore, it is not surprising that it has received considerable attention at the hands of researchers world over. A number of studies have been carried out abroad especially in the developed capital markets of Europe, Australia, Hong Kong, and US. These studies have largely focused on different aspects, viz., (a) the rationale of M&As, (b) allocational and redistribution role of M&As, (c) effect of takeovers on shareholders' wealth, (d) corporate financial performance, etc. Some studies have also been carried out to predict corporate takeovers using financial ratios. M&As, being a new phenomenon in India, has not received much attention of researchers. In fact, no comprehensive study has been undertaken to examine various aspects especially after the Takeover Code came into being in1997. This study has been undertaken to fill this gap.

Until upto a couple of year‘s back, the news that Indian companies having acquired American-European entities was very rare. However, this scenario has taken a sudden U turn. Nowadays, news of Indian Companies acquiring foreign businesses are more common than other way round.

Objectives of the Project

To explore the insights of a corporate event named ―Amalgamation which is a major event by itself and it drags lot of attention and results into many drastic changes in market valuations of a firm.

 To study the impact of ―Amalgamation on price and volume before and after it takes place.
 To verify existence of the abnormality in price and volume of the share as announcement of ―Mergers & Acquisition.
 To analyze the bearing of such abnormality (if it does exists) on the Market Capitalization and Volumes traded on the stock market a month before and a month after the ―Amalgamation takes place for all the scripts under study.
 To measure the cumulative impact of ―Amalgamation event and try to conceive a general trend based on it.

The study is constrained to the amalgamation announcements during the years 2007 to 2009. The data have been collected for all publicly listed companies who announced their amalgamation plans in this specific time period. Out of that data 30 companies have been selected. Those 30 companies are further bifurcated into 10 sectors. The data for the companies is collected from Capitaline and Prowess Software. The stock exchange considered as the market is the Bombay Stock Exchange of India Ltd. All the data for prices, volumes and indices of the companies is collected from the website of the Bombay Stock Exchange of India Ltd.

Meaning of Merger

A merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. There are 15 different types of actions that a company can take when deciding to move forward using M&A. Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. In the United States, business laws vary from state to state whereby some companies have limited protection against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise known as the ―poison pill

In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons.

Historically,mergers have often failed to add significantly to the value of the acquiring firm's shares. Corporate mergers may be aimed at reducing market competition, cutting costs (for example, laying off employees, operating at a more technologically efficient scale, etc.), reducing taxes, removing management, "empire building" by the acquiring managers, or other purposes which may or may not be consistent with public policy or public welfare. Thus they can be heavily regulated.

Classification of Merger

 Horizontal mergers take place where the two merging companies produce similar product in the same industry.
 Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.
 Market Extension Merger and Product Extension Merger

Market Extension Merger

As per definition, market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.

Product Extension Merger

According to definition, product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.

 Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company.

 Conglomerate mergers take place when the two firms operate in different industries.

A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. The contract vehicle for achieving a merger is a "merger sub".

 Accretive mergers are those in which an acquiring company's earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E.

 Dilutive mergers are the opposite of above, whereby a company's EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.

The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers (in some industries, the majority) result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities by one of the partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture. These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.

Reference :

www.bseindia.com for historical prices as on 20th January 2010.
www.cmie.com for M&A deals data collection as on 18th January 2010.
www.moneycontrol.com for news results as and when required.






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