Impact on Shareholders Wealth in M&A Episode

Abstract

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 !! in the "a#e of policy of economic liberali$ation and globali$ation% In this liberali$ed era& si$e and 'core competence' have become the focus of every business enterprise% (aturally& this re)uires companies to gro" and e*pand in businesses that they understand "ell% Thus& leading corporate houses have underta#en a massive restructuring e*ercise to create a formidable presence in their core areas of interest% Mergers and ac)uisitions +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 ban#ers& regulators& stoc# mar#ets& customers& government and ta*ation authorities& and society at large% Therefore& it is not surprising that it has received considerable attention at the hands of researchers "orld over% A number of studies have been carried out abroad especially in the developed capital mar#ets of Europe& Australia& .ong /ong& and 0S%

These studies have largely focused on different aspects& vi$%& +a, the rationale of M&As& +b, allocational and redistribution role of M&As& +c, effect of ta#eovers on shareholders1 "ealth& +d, corporate financial performance& etc% Some studies have also been carried out to predict corporate ta#eovers using financial ratios% M&As& being a ne" phenomenon in India& has not received much attention of researchers% In fact& no comprehensive study has been underta#en to e*amine various aspects especially after the Ta#eover 2ode came into being in !!3% This study has been underta#en to fill this gap% 0ntil upto a couple of year4s bac#& the ne"s that Indian companies having ac)uired American-European entities "as very rare% .o"ever& this scenario has ta#en a sudden 0 turn% (o"adays& ne"s of Indian 2ompanies ac)uiring foreign businesses are more common than other "ay round% 5bjectives of the 6roject To e*plore the insights of a corporate event named 7Amalgamation "hich is a major event by itself and it drags lot of attention and results into many drastic changes in mar#et valuations of a firm% To study the impact of 7Amalgamation on price and volume before and after it ta#es place%8 To verify e*istence of the abnormality in price and8 volume of the share as announcement of 7Mergers & Ac)uisition%

To analy$e the bearing of such abnormality +if it does e*ists, on the8 Mar#et 2apitali$ation and 9olumes traded on the stoc# mar#et a month before and a month after the 7Amalgamation ta#es place for all the scripts under study% To measure the cumulative impact of 7Amalgamation event and try to conceive a general trend based on it%8 The study is constrained to the amalgamation announcements during the years :;;3 to :;;!% The data have been collected for all publicly listed companies "ho announced their amalgamation plans in this specific time period% 5ut of that data <; companies have been selected% Those <; companies are further bifurcated into ; sectors% The data for the companies is collected from 2apitaline and 6ro"ess Soft"are% The stoc# e*change considered as the mar#et is the =ombay Stoc# E*change of India >td% All the data for prices& volumes and indices of the companies is collected from the "ebsite of the =ombay Stoc# E*change of India >td% Meaning of Merger A merger is a tool used by companies for the purpose of e*panding their operations often aiming at an increase of their long term profitability% There are ? different types of actions that a company can ta#e "hen deciding to move for"ard using M&A% 0sually mergers occur in a consensual +occurring by mutual consent, setting "here e*ecutives from the target company help those from the purchaser in a due diligence

process to ensure that the deal is beneficial to both parties% Ac)uisitions can also happen through a hostile ta#eover by purchasing the majority of outstanding shares of a company in the open mar#et against the "ishes of the target1s board% In the 0nited States& business la"s vary from state to state "hereby some companies have limited protection against hostile ta#eovers% 5ne form of protection against a hostile ta#eover is the shareholder rights plan& other"ise #no"n as the 7poison pill In business or economics a merger is a combination of t"o companies into one larger company% Such actions are commonly voluntary and involve stoc# s"ap or cash payment to the target% Stoc# s"ap is often used as it allo"s the shareholders of the t"o companies to share the ris# involved in the deal% A merger can resemble a ta#eover but result in a ne" company name +often combining the names of the original companies, and in ne" branding@ in some cases& terming the combination a 'merger' rather than an ac)uisition is done purely for political or mar#eting reasons% .istorically&mergers have often failed to add significantly to the value of the ac)uiring firm1s shares% 2orporate mergers may be aimed at reducing mar#et competition& cutting costs +for e*ample& laying off employees& operating at a more technologically efficient scale& etc%,& reducing ta*es& removing management& 'empire building' by the ac)uiring managers& or

other purposes "hich may or may not be consistent "ith public policy or public "elfare% Thus they can be heavily regulated% 2lassification of Merger .ori$ontal mergers ta#e place "here the t"o merging companies produce similar product in the same industry%A 9ertical mergers occur "hen t"o firms& each "or#ing at different stages in the production of the same good& combine%A Mar#et E*tension Merger and 6roduct E*tension MergerA Mar#et E*tension Merger As per definition& mar#et e*tension merger ta#es place bet"een t"o companies that deal in the same products but in separate mar#ets% The main purpose of the mar#et e*tension merger is to ma#e sure that the merging companies can get access to a bigger mar#et and that ensures a bigger client base% 6roduct E*tension Merger According to definition& product e*tension merger ta#es place bet"een t"o business organi$ations that deal in products that are related to each other and operate in the same mar#et% The product e*tension merger allo"s the merging companies to group together their products and get access to a bigger set of consumers% This ensures that they earn higher profits% 2ongeneric mergers occur "here t"o merging firmsA are in the same general industry& but they have no mutual buyerBcustomer

or supplier relationship& such as a merger bet"een a ban# and a leasing company% 2onglomerate mergers ta#e place "hen the t"o firms operate in different industries%A A uni)ue type of merger called a reverse merger is used as a "ay of going public "ithout the e*pense and time re)uired by an I65% The contract vehicle for achieving a merger is a 'merger sub'% Accretive mergers are those in "hich an ac)uiringA company1s earnings per share +E6S, increase% An alternative "ay of calculating this is if a company "ith a high price to earnings ratio +6BE, ac)uires one "ith a lo" 6BE% Cilutive mergers are the opposite of above& "herebyA a company1s E6S decreases% The company "ill be one "ith a lo" 6BE ac)uiring one "ith a high 6BE% The completion of a merger does not ensure the success of the resulting organi$ation@ indeed& many mergers +in some industries& the majority, result in a net loss of value due to problems% 2orrecting problems caused by incompatibilityD "hether of technology& e)uipment& or corporate cultureD diverts resources a"ay from ne" investment& and these problems may be e*acerbated by inade)uate research or by concealment of losses or liabilities by one of the partners% 5verlapping subsidiaries or redundant staff may be allo"ed to continue& creating inefficiency& and conversely the ne"

management may cut too many operations or personnel& losing e*pertise and disrupting employee culture% These problems are similar to those encountered in ta#eovers% Eor the merger not to be considered a failure& it must increase shareholder value faster than if the companies "ere separate& or prevent the deterioration of shareholder value more than if the companies "ere separate% Feference G """%bseindia%com for historical prices as on :;th Hanuary :; ;% """%cmie%com for M&A deals data collection as on Ith Hanuary :; ;% """%moneycontrol%com for ne"s results as and "hen re)uired%