Vous êtes sur la page 1sur 10

Dated: __12-07-11 The Editor IJRCM Subject: Submission of Manuscript in the Area of Finance. (e.g.

Computer/Finance/Marketing/HRM/General Management/other, please specify). Dear Sir/Madam Please find my submission of manuscript titled _IMPACT OF M&AS ON THE PERFORMANCE OF THE COMPANIES AND ON SHAREHOLDERS WEALTH for possible publication in your journal. I hereby affirm that the contents of this manuscript are original. Furthermore it has neither been published elsewhere in any language fully or partly, nor is it under review for publication anywhere. I affirm that all author (s) have seen and agreed to the submitted version of the manuscript and their inclusion of name (s) as co-author (s). Also, if our/my manuscript is accepted, I/We agree to comply with the formalities as given on the website of journal & you are free to publish our contribution to any of your journals.

Name of Corresponding Author: Suyash Jain Designation: Student Affiliation: Jaypee Business School Mailing address: C/o Babulal Chakresh Kumar Jain ,Subash Ganj, Ashoknagar (M.P.)473331 Mobile & Landline Number (s): +91-8447342484 E-mail Address (s): suyash608@gmail.com

TITLE: IMPACT OF M&AS ON THE PERFORMANCE OF THE COMPANIES AND ON SHAREHOLDERS WEALTH ABSTRACT: The complex phenomenon that mergers and acquisitions (M&As) represent has attracted substantial interest from a variety of management disciplines over the past 30 years. Three primary streams of enquiry can be identified within the strategic and behavioural literature, which focus on the issues of strategic fit, organizational fit and the acquisition process itself. The recent achievements within each of these research streams are briefly reviewed. However, in parallel to these research advances, the failure rates of mergers and acquisitions have remained consistently high. Possible reasons for this dichotomy are discussed, which in turn highlight the significant opportunities that remain for future M&A research.

Key words: Strategic and behavioral literature, Dichotomy.

Even though mergers and acquisitions (M&A) have been an important element of corporate strategy all over the globe for several decades, research on M&As has not been able to provide conclusive evidence on whether they enhance efficiency or destroy wealth. There is thus an ongoing global debate on the effects of M&As on firms. Mergers and acquisitions have become common in India today. However, very little appears to be known about the long-term post-merger performance of firms in India, and the strategic factors that affect this performance. Our study attempts to fill this gap in knowledge about M&As in India. The performance of mergers can be gauged in two ways by determining whether the longterm post-merger financial performance has changed significantly, and by assessing the wealth gains to shareholders of the acquiring, acquired and the combined firms on the announcement of mergers.. As far as wealth gains on merger announcement are concerned, only the shareholders of the acquired firms appear to be enjoying significant positive share price returns. The shareholders of the acquiring firms and the combined firms do not seem to be witnessing any significant change in returns. With regard to the strategic factors affecting long-term post-merger financial performance, related mergers seem to be performing 5.4% lower than unrelated mergers. Both the transfer of corporate control from the acquired firm to the acquiring firm, and the business health of the acquired firm are positively related to the long-term post-merger performance of the firms. The relative size of the acquired firm and the method of payment for the acquired firm do not appear to be playing a role in affecting post-merger performance. In the case of the effect of the strategic factors on the wealth gains on merger announcement, it is found that the mergers in which there is no transfer of corporate control seem to be conferring significant positive share price returns of 21.1% on the shareholders of the acquired firms. This is not the case for the shareholders of the acquiring firms and the combined firms. In the case of mergers where there is a transfer of management control, none of these three groups of shareholders witnesses any abnormal returns on announcement of the merger. The wealth gains to acquired firm shareholders on announcement of a merger are positively influenced by the relative size and the pre-merger performance of the acquired firm. The transfer of corporate control from the acquired firm to the acquiring firm is negatively associated with these abnormal share price returns. The level of industry-

relatedness of the acquired and the acquiring firms, the method of payment for the acquired firm and the business health of the acquired firm do not appear to be playing a role in affecting the share price returns to the acquired firm shareholders, on announcement of a merger.

The major thrust area for this issue is:

1. Mergers and Acquisitions in Indian focus on comprehensive literature, review of Mergers and Acquisitions in Indian scenario to bring out the Strategic Perspective of Mergers and Acquisitions in new millennium.

2. Pre-Merger and Acquisition Process with focus on the process of Pre-Merger& Acquisition activities, citing few empirical studies. The issue to be addressed are identification, valuation techniques, making an offer, legal and structural issues.

3. Financial issues in Merger & Acquisition with focus on Asset Allocation, risk factors etc. with examples & empirical study on recent M&A transaction in the Indian, US, and European context.

4. Post-Merger & Acquisition Process with focus on the Integration Process, Due Diligence, Cultural Issues, Corporate Systems, Structure, cross-cultural Mergers. Empirical studies invited.

5. A comprehensive Case-Study highlighting the various issues associated with Mergers and Acquisition, highlighting the M&A issue in the Indian context.

OBJECTIVES
y y

To find the main reason as to why a firm goes for a merger. To find if the M&A is always beneficial or it backfires also and the reason for the same

y y

Impact of M&As on the profitability and growth of the combined/acquired firm. Impact of the M&A on the shareholders wealth.

SCOPE The scope of the study will be limited to steel sector in India and for the purpose of this study four cases of M&A will be taken. This study will help in identifying the impact of M&A on the performance and the shareholders wealth of the merged or acquired entity.

METHODOLOGY AND DATA COLLECTION The project will start with the study of literature. The study of work of various researchers and scholars will help me to have the overview of M&A, how it has evolved and what are the rationale behind the process, motives, benefits and opportunities. Also the problems faced by the firm going for it and the ex-efficiencies developed by the firms during the process. I will study four M&As in Indian Steel industry. As throughout the project I shall be making use of secondary data. So the report will be true only to the extent of the information available on the net. There are two different tests to measure merger gains-Product market test and Stock market test. The former measures the effect of mergers directly on consumers and indirectly on stockholders of merging firms. The later measures the effect of mergers directly on stockholders of merging firms and indirectly on consumers. There is a linkage between the two. Abnormal Stock returns are correlated with profit changes. This signifies that the stock market anticipates profit changes and adjusts accordingly. To test the impact of Mergers on performance, there are various alternative ways. Like Event Studies, where we compare stock prices of the firms a certain days before and after the mergers. Another way is Regression Analysis, where we can take after tax rate of return as dependant variable and Size of the firm, rate of increase in capital stock, R&D expenditures etc. as independent variables. Third way is T-test: Paired two samples for mean which I am going to use in this paper.

In this paper I test impact of mergers on the performance of the company in terms of four parameters: ROCE, Economies of scale, Operating Synergy and Financial Synergy.

LITERATURE REVIEW 1. Pre and post merger financial performance of Merged banks in India Dr. K. Srinivas This study examines the success of M&As strategy in the banking sector by analyzing financial performance of selected merged banks in relation to the changes in pre and post merger period. The various financial ratios used for the purpose of the study are:
y y y y

Liquidity Ratios Profitability Ratios Solvency Ratios Asset Quality

To assess the financial performance of merged banks, the study adopted the CAMEL model. Apart from this, the study also considered the test of hypotheses by selecting the student t-statistic for measuring the financial performance. 2. Impact of Mergers on profitability of Acquiring CompaniesF. Singh & M. Mogla This study analyses the profitability of merged entities in the post liberalization period, since M&A activity gathered momentum during this time. Moreover, the analysis is done at both firm and industry level so as to arrive at pure merger benefits. The study tries to
y y

find out the merger motives by comparing pre merger and post merger performance identify the sources of profitability

y y

compare performance over sub samples compare the performance of merging firms over non merging firms.

In this study, after the list of merged firms was identified from BSEs publication a compilation was performed from the monthly EIS publications. The sample firms were chosen on the basis of data requirements, and the exclusion of financial firms because of their accounting and regulatory requirements. 3. Worldwide Acquisition by Indian Companies: A Case Study of Hindalco Ind. Ltd. -S. Pandey and Uma Shankar This study involves the following aspects:
y y y y

Reasons for the acquisition How the fund was arranged by Hindalco Challenges faced by Hindalco in integrating the operation Benefits of acquisition to both the companies

4. HDFC Bank and CBoP Merger: A Quest for Growth Bikram Mann and Reena Kohli The study aimed at identifying the impact of the said merger on shareholders wealth of both the acquiring as well as the target bank by employing Standard Event Study methodology. It also evaluated how the exclusive synergies that CBoP was bestowing on HDFC Bank helped in improving the immediate performance of the merged entity. 5. Uniteds Brewery Acquisition of Whyte & Mackay: The potential Strategies Vartika Gupta The study aims at identifying the strategies from the acquisition that are expected to benefit both the companies. The acquisition is one among the largest outbound acquisition by an Indian Company which made the UB Group a global player. It put forwards that a bilateral approach for the expansion of premium brands of spirits in the home market as well as in the international market.

6. How to create competency based synergy in M&A Andrejs Chirjevskis This paper investigates whether core competence transfer in a merger process is an important source of synergy. The authors have developed a model which allows to make a preliminary evaluation of core competencies as a source of energy. The existing methods of core competence evaluation were investigated and found bto be ineffective in the M&A process.

A new ARCTIC model, based on six success factors have been developed and tested. It can be used effectively in evaluation of core competencies in the M&A context. 7. The taxation of Mergers Directive as amended Arvind Astha The paper discusses the different types of restructuring considered by the directive 90/434/EEC on the taxation of mergers. The directive covers the common system of taxation applicable to mergers, divisions, partial divisions, transfer of assets, and exchange of shares and transfer of registered offices concerning companies of different member states. The paper outlines the different impediments to cross border mergers. Of these impediments, the EC has sought to defer taxation in cases where restructuring organisations face liquidity problems owing to fiscal reasons. 8. Tatas acquisition of Corus: A Quantum Leap Rashmi Malapur The case discusses the odyssey of Tata-Corus deal- how Tata group ousted Brazilian rival CSN by five pence with a 608 pence a share offer and acquired Corus, the erstwhile British steel major, at $12.1 bn dealto become the worlds sixth largest steelmaker. The case also covers the post deal scenario. The case would help to analyse the implications of the deal on the steel market and understand the synergies from the deal.

9. A second research stream based on event study methodology has used market-based measures to compare the performance characteristics of acquisitions under different diversification strategies (Mandelker, 1974; Jensen, 1984; Ravenscraft and Scherer,1987). According to this group of researchers, the concept of economic value is consistent with that of financial economists, so the value in the context of merger should be reflected in the stock price of the firms (Singh and Montgomery, 1987). Fundamental to this belief is the basic assumption of the efficient market hypothesis, namely the share price which would react in a timely and unbiased manner, to any new information. In an efficient market, all future benefits of a merger are ful1y anticipated and they are incorporated instantaneously into the acquiring firm's stock price at the time the merger is consummated (Lubatkin, 1983). The share price reactions do seem to reflect the rational behavior (Roll, 1986) and can identify the expected present value of the cash flows resulting from the restructuring activity (Seth, 1990). Hence a firm's postmerger share price performance is one indicator of the synergy gain that is generated by a merger or an acquisition and the merger as a corporate strategy can be evaluated when the long-term effect of mergers on the firm's share price performance is considered. 10. Study on the gains from M&A Berkovitch and Narayanan In 1993, Berkovitch and Narayanan conducted a study on the gain and concluded that total gains from M&A are always positive and thus can say that synergy appears. Vin (1996) and Schwert conducted an event study for a period of fourty days prior merger to 40 days post merger and concluded that Merged firms were under performing than their industry counterparts.

M&A for maximizing shareholders wealth Introduction Mergers and acquisitions (M&A) take place to maximize shareholder wealth for three value-increasing reasons: to gain synergies, to increase tax effectiveness, or to take advantage of bargains in the market.1 Synergy exists if the value of combining two

companies is greater than the sum of the values of the two operating assets of the companies individually. Examples of synergies include economies of scale, economies of scope, and elimination of duplicate efforts in management, technology, and research and development. Reduction of tax payments to the government creates value in mergers and acquisitions. Tax efficiency can be achieved when a profitable firm acquires an unprofitable firm and uses its net operating loss carryforwards. Cross-border mergers and acquisitions also offer the opportunity for the merging companies to reside in the lower of the two tax states. Bargains exist when a company is acquired for less than its intrinsic value. This occurs when the company is being mis-priced by the market or when the firm is being mismanaged. In crossborder M&A transactions, relative currency strength may also be a factor in creating mispricing opportunities. Additionally, M&A activity often occurs for strategic purposes that may not be viewed to be creating immediate value, such as turning to acquisitions to redeploy excess cash, to gain a stronger position relative to the other competitors in a market, to gain access to new markets or customers, among others. Total M&A transactions completed worldwide have grown at an average annual rate of 42% since 1980, to reach $2.3 trillion in 1999.