Fms Effect Of Merger And Acquisitions

Published Date: 02 Nov 2017

A project submitted in the partial fulfillment of requirement for award of the degree in Master of Business Administration

Under the guidance of:

Dr. MONICA SINGHANIA

Submitted by:

Sakshi Joshi

MBA (FT) | F – 46

Area Code: FIN

FACULTY OF MANAGEMENT STUDIES

UNIVERSITY OF DELHI

MARCH 2013

Certificate

This is to certify that the project titled "Effect of Mergers and Acquisitions on Stock Market Performance", submitted in the partial fulfillment of requirement for award of the degree in Master of Business Administration at the Faculty of Management Studies, University of Delhi is the student’s bona-fide work. Any material borrowed or referred to is duly acknowledged.

Signed & Dated

Signed & Dated

Name of Student:

SAKSHI JOSHI (F-046)

FMS MBA (FT) 2011-13

Name of Supervisor:

DR. MONICA SINGHANIA

Acknowledgement

I would hereby like to thank my guide Dr. Monica Singhania for her constant help and support in completing this project. Pursuing a project in such a vast and dynamic field would not have been possible without her encouragement and guidance.

Apart from the project work, I also owe my gratitude to Dr. Monica Singhania for being a faculty member who has always laid strong emphasis on creative thinking and always been there for her students whenever they needed her support and guidance.

I would also like to thanks the entire faculty at FMS, Delhi for providing me with a very enriching and fruitful stint which has gone a long way in making me realize my potential and interests. Last but not the least, I would also like to thanks my colleagues and staff at the library and the computer center for extending full support and cooperation at every stage of the project.

I have learnt from several articles, research studies and papers from national and international entities. I acknowledge the value I have received from these bodies of knowledge.

Sakshi Joshi

Roll number – 46

MBA (FT) | 2011-2013

Faculty of Management Studies

University of Delhi

March 2013

Contents

List of Tables

List of Figures

Executive Summary

The main aim of this research is to analyze the impact of mergers and acquisitions on the operating performance, mainly stock market performance of the acquirer as well as target firms."

The following are the objectives of the study:

To critically analyze the impact of mergers and acquisitions on the operating performance of the acquiring as well as target firms in India.

To strategically evaluate the impact on shareholders wealth post-merger and acquisition

To quantitatively determine whether shareholders of the acquiring or target firms will experience any abnormal returns in the time window around the announcement of the merger or acquisition.

Mergers have been the prime reason by which companies around the world have been growing. The inorganic route has been adopted by companies forced by immense competition, need to enter new markets, saturation in domestic markets, thrust to grow big and maximize profits for shareholders. In the changing market scenario it has become very important for firms to maximise wealth for shareholders. Many researchers have shown significant findings out of their research. The Hubris hypothesis in fact states that the announcement of a merger or acquisition does not lead to return for shareholders since the acquisition would only lead to transfer of the wealth from the bidding shareholders to the target shareholders. A number of studies have been done in various countries across the world to find out whether mergers and acquisitions create maximization of wealth for shareholders.

The list of all Mergers and Acquisitions that took place in India in the time period 2005-13 and across sectors was obtained from the Bloomberg terminal database. Further was required the daily stock prices for all the companies involved in the deals, for a time period of -60 to +60 days around the announcement of the merger or acquisition, which was taken as the window for return forecasting. Hence only those deals were considered for the study in which the involved companies were listed on the Bombay Stock Exchange.

‘Event study’ methodology has been used in this study to ascertain whether there were any abnormal returns associated with Merger and acquisition announcements in India. For this study the estimation period & event period were as follows.

The daily stock prices for the companies involved are collected from BSE Website for the days -60 to day 60, including event announcement date (day 0). BSE SENSEX Index values are collected for the days -60 to day 60 including event announcement date (day 0) for each deal. Data are collected for companies involved in 80 deals which are listed on the BSE and are the subject of this study. After collecting the data, the estimation period (day -60 to day -10), (day 10 to day 60) and event period (day -10 to day 10) are separated. Using the daily stock prices, the daily return for the each day of the whole period study (day-60 to day 60) are calculated for all target and acquiring companies.

The other steps carried out were:

Estimation of Return

Estimation of Theoretical Return Before the Event

Estimation of Theoretical Return After the Event

Estimation of Abnormal Return

Testing of hypothesis

This study of the wealth gains on announcement of the merger, to shareholders of the acquiring firm, and the acquired firm in India, shows that, on an average, and at a 5% level of significance, none of the two parties appear to enjoy significant wealth gains. The acquiring firm and the target firm shareholders do not seem to reap any such benefits, consistent with the findings of studies in other countries. The CAARs to the acquired firm shareholders are significantly higher than those for the acquiring firm shareholders. This is perhaps because, on average, the acquired firms are lagging behind in their industries in terms of financial performance. It was seen at a higher level of significance, that the acquired firm showed significant values of CAAR in various windows around the event, and the acquiring firm showed them in the window of 10 days succeeding the event.

The expectation, on announcement of a merger, of the firm being merged with a better performing firm and being managed more capably leads to a positive evaluation in the market, resulting in wealth gains. On the other hand, the possibility of the acquirer being saddled with an under-performing acquisition, resulting in lower financial performance in future, leads to lower CAARs to the shareholders of the acquiring firm.

Introduction

In this era of globalization, Merger and Acquisitions has become a thing of common nature. Various reasons for getting into Merger and Acquisition are to use them as a way to expand faster, capture new market and enter new boundaries. Due to the highly prevalent nature of Mergers and acquisitions and the increase in investor activity in this era, it is an area of importance to find out the effect of mergers on the stock market performance of these companies. Many investors may like to purchase the shares on hearing merger announcements and like to book a profit before exiting the share market. This study tries to examine whether the shareholders of the acquiring or the acquired company earn any abnormal return. Many new and small investors are entering Indian stock market. The purpose of this study is to show a true picture of whether they will benefit by investing in a company undergoing a merger or acquisition.

The corporate sector all over the world is undergoing restructuring activities of its operations via different types of consolidation strategies like mergers and acquisitions so as to face challenges posed and opportunities created by the new pattern of globalization and internalization, which has led to a much greater integration and interaction of national and international markets. The intensity of such operations is increasing with the de-regulation of various government policies. The reforms process that was initiated by the Indian government in 1991, has influenced the Indian firms in various ways, such as their functioning and governance, which has resulted in restructuring of operations and adoption of different growth and expansion strategies by the corporate firms. These reforms have opened up a whole lot of challenges, opportunities and changes, both in the domestic and international spheres. In this scenario, Indian organizations are facing challenges from both, domestic competitors as well as foreign competitors, who now have the freedom to suddenly appear from anywhere on the globe. The increased competition in the global market as well as from advent of this competition in the domestic markets has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. Merger and acquisition (M&A) activities have been in a rapid growth stage since 2000.

Historically, M&As have shown a cyclical pattern. There have been six waves of M&As since the past 100 years; these are those of the early 1900s, 1920s, 1960s, 1980s, 1990s, and 2000s.The trends of mergers and acquisitions in India have changed over the years. The immediate effects of the mergers and acquisitions also change depending upon the sector of operation in the Indian economy.

Especially in emerging economies like India, Mergers and acquisitions (M&As) are growing in number, value and importance. However, relatively little or nothing is known about the wealth various shareholders gain when an announcement is made regarding mergers in the Indian stock markets. This is primarily due to paucity of published research on this topic. There are many new trends coming about in the emerging Indian corporate scene, and the Indian industry generally has also witnessed a spate of corporate restructures in the form of mergers of companies within business groups as well as inter-group takeovers.

In today’s scenario, the main objective of any firm is to create wealth for shareholders and generate as much profit as possible. There are many ways via which growth can be achieved, some of them being entering into new products or services, or expanding and growing current areas of operations in the existing products. Growth of a firm can be internal as well as external in nature. Internal growth can be sought after by introducing a new line of product or services, whereas for external or inorganic growth, it is necessary for companies to enter into mergers and acquisitions [1] .

As mentioned above, mergers and acquisitions have recently gained a lot of spurt as a means of external growth because of increased deregulation, privatization, globalization, and liberalization adopted by several countries all over the world. While on one hand, mergers and acquisitions are used as an important medium to expand product portfolios, enter new markets, acquire new technologies, gain access to various resources and research and development [2] , on the other hand there are some examples in which mergers and acquisitions are entered into for purely qualitative reasons, which may be building a company’s profile or prestige [3] .

Mergers and acquisitions as a means of consolidation has been seen all over the world in the recent times, in almost all sectors and industries, ranging from banking, telecom, aviation, oil and gas to automobiles, infrastructure etc. There has been a lot of research and study in the areas of economics, statistics and strategy on the kinds and range of benefits that an acquiring or target company, customers, shareholders and on the whole all the stakeholders can derive out of a merger or acquisition. But the most widely researched topic has been the one on creation of wealth for shareholders due to mergers and acquisitions. Even before the actual merger or acquisition takes place, the mere announcement of it is such sensitive newscan impact the stock prices of the involved companies, by bringing in positive or negative sentiments, based on whatever reaction that investors have with regard to the two companies entering into the merger or acquisition, leading to a rise or fall in the stock prices and ultimately a change in the shareholders wealth.

However it should also be remembered that it is not a regular phenomenon for mergers and acquisitions to create wealth for shareholders. There are many announcements of mergers and acquisitions that would create feelings of apprehension in the mind of shareholders, or a perception of failure as well. Failure of a merger or acquisition may occur when it lowers or deteriorates the wealth of shareholders, this may be because of shareholders’ perception or because the integration process for mergers and acquisitions does not work in a proper flow. It has been estimated by various consulting firms that almost two thirds of the firms who enter into mergers and acquisitions result into failure which might lead to a divestiture at a later stage [4] .

Mergers and Acquisitions of Indian companies:

Times have largely changed as far as mergers and acquisitions of and by Indian companies are concerned. It would be unheard of to think of an Indian company acquiring foreign based companies a few years back but now it has become common news. Situations of Indian companies venturing abroad and acquiring foreign companies have become very frequent. Some of these deals which have made Indian companies famous all over the world are – merger of Tata Steel and Corus group, Hindalco and Novelis, Videocon and Daewoo Electronics Corporation etc. In the year 2001 the value of Indian mergers and acquisitions abroad was only USD 0.7 billion, which has grown multifold by now.

Strategy for Merger and Acquisitions

Firm Diversification – Generally firms enter into mergers and acquisitions with firms which are usually in the same and connected line of business rather than diversifying and entering into businesses in which the firm is new and lacks experience. But on the other hand, companies that enter into mergers and acquisitions with diversified firms can explore different advantages and opportunities which are not available with undiversified firms. Diversification is "a process of operating into different industries and to diversify in such a way which helps to influence the value of the firm and enhance shareholders value." [5] The most important reason for firms to diversify is so that the risk can be spread out across the different industries in which the firm is operating. Secondly, the capital markets and investors would welcome the multilevel activities which the firm can easily carry out through the diversification route which would invariably lead to profitability and growth of the firm. However, there lies a risk in mergers and acquisitions as it has to conduct its own test on strength and weaknesses before exploring other industries, sectors or markets.

Cross Border Mergers and Acquisitions

Internationalization is one of the very important and prevalent strategies that are being adopted by firms nowadays so as to spread their operations far and wide, in other countries and geographies. Cross border mergers and acquisitions refer to acquisitions done by parent company with headquarters in one country and target or the merger in another country. Domestic mergers and naturally easier to execute because of a familiarization of the involved companies, the legal laws and procedures and many other such factors. However, various complexities are created in case of international mergers and acquisitions. Companies still like to go for such mergers and acquisitions because to enter and set up base in a foreign country from scratch is a very time consuming and expensive option, and to set up supply chain and infrastructure facilities in a foreign land is again very time and cost consuming. Various studies have shown that as compared to domestic mergers and acquisitions, cross border deals have shown an immense increase in the rise of shareholders’ wealth with significant gains after the announcement of such a deal.

Economic Rationale behind M&As

Sometimes the backing of a larger company is all that the smaller companies need to return to profitability. In the case of an acquisition, the purchaser is speculating that the company will be of greater value at some future point in time. There are many financially motivated reasons why a company may choose to merge or acquire another company. Large scale mergers eliminate competition and secure a greater market share. In some cases, an acquisition may take place so that one company can acquire its competition. Regardless of the primary reason for the merger or acquisition, one can be certain that at least one company will benefit from it. In many cases, there will be a mutual benefit and the combined company will be more profitable. Some companies were created to be sold, providing quick cash revenue for their owners, as opposed to the long-term gains that are the typical reason for starting a business.

The principal problems encountered in measuring merger benefits are establishment of a standard for their measurement and adjustment of measured benefits for changes in the firm's risk. To establish a standard, the firm's merger decision is viewed as one of external rather than internal expansion. Thus, the return received as a result of the acquisition must be compared to the return the shareholders would have received had there been no merger. The difference is the merger benefit. Since the hypothetical or non- merger return cannot be observed, it is necessary to find a reasonable proxy. Financial theory says that shareholders must be compensated if the merger makes the equity of the acquiring firm more risky. Therefore, the difference between the actual return at the new risk level and the hypothetical non merger return contains two elements - merger benefits and compensation for changed risk. To measure only the merger benefits risk compensation must be removed.

Aims and Objectives of the Research

Aim:

"The main aim of this research is to analyze the impact of mergers and acquisitions on the operating performance, mainly stock market performance of the acquirer as well as target firms."

Objectives:

The following are the objectives of the study:

To critically analyze the impact of mergers and acquisitions on the operating performance of the acquiring as well as target firms in India.

To strategically evaluate the impact on shareholders wealth post merger and acquisition

To quantitatively determine whether shareholders of the acquiring or target firms will experience any abnormal returns in the time window around the announcement of the merger or acquisition.

Hypothesis of the Research:

To find the impact of Merger announcement on the Share price the following hypothesis is framed:

H0: Merger & Acquisition announcements have no significant impact on stock returns

H1: Merger & Acquisition announcement have a significant impact on stock returns.

Structure of the Report:

The entire report would be spread across the following headers:

Introduction

Historical Background

Literature Review

Research Design

Analysis & Findings

Summary & Recommendations

Historical Background

Research Design

Data Set – Deals Analyzed

A total of 80 deals across a range of sectors from Oil and Gas, Banking, Telecom to Aviation and Infrastructure have been analyzed in this study..

The deals covered in the analysis are as follows:

Table : Deals covered in analysis

Acquirer

Target

Ann. Date

Kotak Mahindra Bank Ltd

Business Loans Portfolio

2/5/2013

Canara Bank

Vinyas Innovative Technologies Pvt Ltd

1/4/2013

ICICI Bank,Everstone Capital Advisors Pvt Ltd

Sohan Lal Commodity Management Plc

11/19/2012

L&T Finance Holdings Ltd

FamilyCredit Ltd

10/20/2012

Standard Chartered PLC

Prime Focus Ltd

10/11/2012

Asian Oilfield Services Ltd

Wireless Seismic RT System 2

9/22/2012

Tech Mahindra Ltd

Comviva Technologies Ltd

9/17/2012

Brooks Brothers Inc

Reliance Industries Ltd

6/5/2012

Olympus Capital Holdings Asia/Private Equity

Karur Vysya Bank Ltd

4/18/2012

Essel Shyam Communication Ltd

IVRCL Ltd

3/28/2012

Reliance Industries Ltd

Iconix Brand Group Inc

2/22/2012

General Atlantic LLC

IndusInd Bank Ltd

2/10/2012

Fortis Healthcare Ltd

Radlink Asia Pte Ltd

2/1/2012

TV18 Broadcast Ltd

Eenadu Group

1/3/2012

Tata Power Co Ltd

Tata Power Solar Systems Ltd

12/27/2011

GAIL India Ltd

Eagle Ford Shale Gas Project

9/29/2011

Tata Chemicals Ltd

EPM Mining Ventures Inc

8/23/2011

GVK Power & Infrastructure Ltd

Bangalore International Airport Ltd

8/22/2011

General Atlantic LLC

IndusInd Bank Ltd

8/12/2011

Piramal Enterprises Ltd

Vodafone India Ltd

8/10/2011

ICICI Bank Ltd

GTL Ltd

7/28/2011

Cadila Healthcare Ltd

RFCL Ltd

7/27/2011

Sumitomo Corp

VA Tech Wabag Ltd

7/26/2011

IFCI Ltd

GTL Infrastructure Ltd

7/21/2011

JM Financial Ltd

Loan and credit card portfolio

7/21/2011

IDBI Bank Ltd

Universal Commodity Exchange

7/6/2011

Standard Chartered PLC,Unnamed Buyer

Redington India Ltd

7/4/2011

Infosys Ltd

Software solutions Unit

6/8/2011

TE Connectivity Ltd

ADC India Communications Ltd

3/4/2011

General Atlantic LLC

IndusInd Bank Ltd

3/1/2011

Wolfensohn & Co, Tano Capital,TVS Capital Funds Ltd

Development Credit Bank Ltd

2/24/2011

Private Investor

Kavveri Telecom Products Ltd

2/7/2011

GTL Infrastructure Ltd

Chennai Network Infrastructure Ltd

12/16/2010

Axis Bank Ltd

Enam Securities Pvt Ltd

11/10/2010

Reliance Industries Ltd

EIH Ltd

8/30/2010

Vedanta Resources PLC

Cairn India Ltd

8/16/2010

Sumitomo Mitsui Financial Group Inc

Kotak Mahindra Bank Ltd

6/30/2010

Kal Airways Pte Ltd

SpiceJet Ltd

6/11/2010

Reliance Industries Ltd

Infotel Broadband Services Ltd

6/11/2010

ICICI Bank Ltd

Bank of Rajasthan

5/18/2010

Loyz Energy Ltd

Interlink Petroleum Ltd

4/29/2010

GTL Infrastructure Ltd

Tower portfolio

1/14/2010

Aegis Logistics Ltd

Shell Gas LPG India Pvt Ltd

12/22/2009

Singapore Telecommunications Ltd

Bharti Telecom Ltd

10/30/2009

Indian Oil Corp Ltd

Oil India Ltd

9/16/2009

GAIL India Ltd

Oil & Natural Gas Corp Ltd

3/16/2009

Reliance Industries Ltd

Reliance Petroleum Ltd

3/2/2009

GMR Infrastructure Ltd

Malaysian Airline System Bhd

2/27/2009

NTT DOCOMO Inc

Tata Teleservices Ltd

11/12/2008

Telenor ASA

Unitech Wireless Pvt Ltd

10/29/2008

Shree Renuka Sugars Ltd

Hindustan Petroleum Corp Ltd

9/11/2008

Oil & Natural Gas Corp Ltd

Imperial Energy Corp PLC

8/26/2008

Invesco Ltd

SpiceJet Ltd

7/15/2008

Axiata Group Bhd

Idea Cellular Ltd

6/25/2008

Oilex Ltd

Bharat Petroleum Corp Ltd

6/5/2008

HDFC Bank Ltd

Centurion Bank of Punjab Ltd

2/23/2008

Kingfisher Airlines Ltd

Kingfisher Airlines Ltd/Old

1/31/2008

Bank of Baroda

Andhra Bank

11/19/2007

Shareholders

GTL Ltd

8/14/2007

Reliance Communications Ltd

Yipes Communications Inc

7/16/2007

Wipro Ltd

Unza Holdings Ltd

7/6/2007

United Breweries Holdings Ltd

Kingfisher Airlines Ltd

6/20/2007

Spanco Ltd

Omnia BPO Services Ltd

6/7/2007

BNP Paribas SA

Sundaram Finance Ltd

5/9/2007

Jet Airways India Ltd

Jet Lite India Ltd

4/12/2007

Reliance Industries Ltd

Indian Petrochemicals Co

3/10/2007

Oriental Bank of Commerce

HSBC Holdings PLC

3/5/2007

Istithmar World PJSC

SpiceJet Ltd

2/9/2007

Bharti Airtel Ltd

Network i2i Ltd

1/23/2007

Aban Offshore Ltd

Sinvest ASA

1/9/2007

ICICI Bank Ltd

Sangli Bank Ltd

12/9/2006

IDBI Bank Ltd

United Western Bank Ltd

9/13/2006

Aditya Birla Nuvo Ltd

Minacs Worldwide Inc

6/23/2006

Siva Ventures Ltd

Sahara One Media & Entertainment Ltd

5/22/2006

Tata Communications Ltd

Direct Internet Ltd

5/8/2006

Kotak Mahindra Bank Ltd

Kotak Mahindra Capital Co Ltd

3/16/2006

Sterling Infotech Group

Tata Teleservices Maharashtra Ltd

2/27/2006

Indian Overseas Bank

Bharat Overseas Bank Ltd

2/14/2006

Data Results and Analysis

The first step was to calculate the daily returns for each of the target and acquiring companies for the forecasting window of -60 to +60 days of the announcement date (0 day). The procedure is illustrated below through an example:

Acquirer Company: NTT DOCOMO Inc.

Target Company: Tata Teleservices Ltd

Announcement Date: 12-November-2008

Table : Estimation of Return

DAY

Stock Price (Rs.)

Market Index (BSE)

-60

27.5

15093.12

-59

26.5

14724.18

Stock Return for day -59 = (26.5-27.5)/27.5*100 = -3.64%

Market Return for day -59 = (14724.18-15093.12)/15093.12*100 = -2.44%

Using these, a regression was done between the two, taking the market returns as independent variable and dependent returns as dependent variable, and finding out the values of α and β for each acquiring and target company. This was done using the data for all the days in the forecasting window. Firstly α1 and β1 were calculated for the period of day -10 to day 0, called the window before the event. Next, α2 and β2 were calculated for the period of day 0 to day 10, called the window after the event. The results for target and acquiring companies are given in the appendix. Next step was to calculate the normal forecasted returns before and after the event, that is from days -10 to +10. This was done by using the values of α and β obtained above.

The procedure is illustrated below through an example:

For Tata Teleservices Ltd:

α1 = -0.0142, β1 = 0.0374, α2 = 0.0029, β2 = -0.0311

Table : Estimation of Forecasted Return

Day

Market Return

-10

0.0586

+10

0.0073

Forecasted return for day -10 (Before the event window) = (-0.0142) + (0.0374)*0.0586 = -0.012

Forecasted return for day +10 (After the window event) = (0.0029) + (-0.0311)*0.0073 = 0.0027

Next step was to calculate the normal forecasted returns before and after the event, that is from days -10 to +10. This was done by using the values of α and β obtained above.

Using the daily returns of each company during the event window, and the normal forecasted returns, we obtained the value of "Abnormal Returns" for each company on each day of the event window.

The procedure is illustrated below through an example:

For Tata Teleservices Ltd:

Table : Estimation of Abnormal Returns

Return

Day -10

Actual Return

-0.0860

Forecasted Return

-0.0120

Abnormal Return for day -10 = Actual – Theoretical = -0.0860 – (-0.0120) = -0.0740

Next step was calculation of Cumulative Abnormal Returns for each pair of days for the event window, starting from (-10,-9) up to (9,10) for each company. Using this data, CAAR or Cumulative Average Abnormal Returns are calculated for the event window.

The procedure is illustrated below through an example:

For Tata Teleservices Ltd:

Table : Estimation of Cumulative Abnormal Returns

Day

Abnormal Return

-10

-0.0740

-9

0.0140

Cumulative Abnormal Return for window (-10,-9) = -0.074 + 0.014 = -0.06

The CAR results (appendix 6) show some considerable movement in the Cumulative Abnormal returns, which in case of target companies is seen to rise after the event day, and in case of acquiring companies is seen to fall.

The standard deviation of CARs was also calculated, which can be found in Appendix 7.

Finally, the CAARs and Standard Deviation was calculated for cumulative abnormal returns of the entire window prior to the event (day -10 to day 0), the entire window after the event (day 0 to day 10), and the entire event window (day -10 to day 10), the results of which can be found in Appendix 8.

Testing of hypothesis:

The CAR is tested for significance using the t-test. In the case of the t-test, for anyday t in the event period, the abnormal returns of all the sample firms’ shares are averaged to give the mean return ARt.st is the cross-sectional standard deviation given by the formula:

To determine if the abnormal returns are significant, the Z test on the event window for all stock is constructed as:

Z = CAAR (t1,t2) – μ /S(CAR(t1,t2))

Where μ is the Abnormal Return being tested for significance and takes the value of zero.

The test statistics for standard error of prediction S( CAR (t1,t2)) is calculated by dividing the Average Abnormal Return of all stock over a specified event period (t1,t2) by the standard deviation of the estimation using Z statistics

Where σ2 is the estimator of the variance, n is the number of sample stocks who’s excess returns are available at day t. CAAR is calculated by averaging the CAR data for all companies for each day i.e.,(-10,-9),(-9,-8)…(8,9),(9,10).

CAR (-1,0)

1.14%

0.05

48

7

0.007

1.582

1.582

Accept

CAR (0,1)

0.60%

0.05

48

7

0.008

0.756

0.756

Accept

CAR (1,2)

-0.58%

0.03

48

7

0.005

-1.159

1.159

Accept

CAR (2,3)

-0.39%

0.04

48

7

0.005

-0.737

0.737

Accept

CAR (3,4)

-0.47%

0.03

48

7

0.005

-1.006

1.006

Accept

CAR (4,5)

0.13%

0.04

48

7

0.005

0.243

0.243

Accept

CAR (5,6)

0.38%

0.03

48

7

0.005

0.780

0.780

Accept

CAR (6,7)

0.50%

0.04

48

7

0.005

0.947

0.947

Accept

CAR (7,8)

0.29%

0.04

48

7

0.006

0.499

0.499

Accept

CAR (8,9)

0.33%

0.03

48

7

0.005

0.664

0.664

Accept

CAR (9,10)

0.88%

0.04

48

7

0.005

1.686

1.686

Accept

CAR (-10,-1)

-0.48%

0.10

48

7

0.014

-0.341

0.341

Accept

CAR (0,10)

1.76%

0.09

48

7

0.013

1.322

1.322

Accept

CAR (-10,10)

1.28%

0.14

48

7

0.020

0.651

0.651

Accept

This analysis also shows that at level of significance 5%, there is no window of days that shows that CARs are significant. The null hypothesis has been accepted in all cases, showing that there are no significant abnormal returns generated before or after the event.

This shows that the null hypothesis has been accepted, i.e.

At 5% level of significance, Merger & Acquisition announcements have no significant impact on stock returns

T-test (10% Level of Significance)

Since the results obtained on taking 5% level of significance did not suggest presence of any abnormal returns for any of the two parties in case of mergers or acquisitions, a broader level of significance has also been used to test the hypothesis. Though the result obtained may not be most reliable, but they would help in giving a better perspective.

For 10% level of significance, critical value = 1.28

TARGET COMPANIES

Table : Results of t-Test (Target Companies) 10% LOS

Days

CAAR

Std Dev

N

Sqrt(N)

Std Err

z-value

|z|

Hypothesis

CAR (-10,-9)

-0.38%

0.05

36

6

0.008

-0.500

0.500

Accept

CAR (-9, -8)

1.20%

0.06

36

6

0.010

1.255

1.255

Accept

CAR (-8,-7)

0.02%

0.08

36

6

0.013

0.016

0.016

Accept

CAR (-7,-6)

0.85%

0.07

36

6

0.011

0.763

0.763

Accept

CAR (-6,-5)

1.35%

0.05

36

6

0.008

1.620

1.620

Reject

CAR (-5,-4)

0.03%

0.04

36

6

0.007

0.046

0.046

Accept

CAR (-4,-3)

-0.54%

0.09

36

6

0.014

-0.377

0.377

Accept

CAR (-3,-2)

0.55%

0.06

36

6

0.010

0.565

0.565

Accept

CAR (-2,-1)

1.22%

0.10

36

6

0.017

0.739

0.739

Accept

CAR (-1,0)

0.64%

0.05

36

6

0.008

0.753

0.753

Accept

CAR (0,1)

1.54%

0.07

36

6

0.011

1.397

1.397

Reject

CAR (1,2)

1.77%

0.09

36

6

0.014

1.244

1.244

Accept

CAR (2,3)

2.11%

0.07

36

6

0.012

1.770

1.770

Reject

CAR (3,4)

0.93%

0.05

36

6

0.008

1.112

1.112

Accept

CAR (4,5)

0.30%

0.05

36

6

0.008

0.358

0.358

Accept

CAR (5,6)

-0.15%

0.04

36

6

0.007

-0.227

0.227

Accept

CAR (6,7)

-0.80%

0.05

36

6

0.008

-1.043

1.043

Accept

CAR (7,8)

-0.36%

0.06

36

6

0.009

-0.385

0.385

Accept

CAR (8,9)

-0.39%

0.03

36

6

0.005

-0.815

0.815

Accept

CAR (9,10)

0.01%

0.04

36

6

0.007

0.012

0.012

Accept

CAR (-10,-1)

1.67%

0.11

36

6

0.018

0.923

0.923

Accept

CAR (0,10)

2.86%

0.17

36

6

0.029

0.994

0.994

Accept

CAR (-10,10)

4.53%

0.21

36

6

0.035

1.284

1.284

Reject

The above table shows the CAAR calculation for the 2-day, 10-day and 21-day window and their z-statistic.We note that the rejection of the null hypothesis in the cases CAAR (-6,-5), CAAR (0,1), CAAR (2,3) and over the entire 21 day window, CAAR (-10,10) shows that these values of the CAAR calculated are significantly different from 0 at 10% LOS.

This implies that the shareholders of the target company do not get any abnormal returns due to the merger announcement during the other time windows, but may gain abnormal returns during the time windows cases CAAR (-6,-5), CAAR (0,1), CAAR (2,3) and over the entire 21 day window, CAAR (-10,10). This means that at 10% level of significance, the shareholders could have gained the excess return over these time windows by buying the firms’ stock and selling it again. The presence of significant CAAR over the 21 day window shows that shareholders of the target company stand to gain because of the announcement of the merger or acquisition.

ACQUIRING COMPANIES

Table : Results of t-Test (Acquiring Companies) 10% LOS

Days

CAAR

Std Dev

N

Sqrt(N)

Std Err

z-value

|z|

Hypothesis

CAR (-10,-9)

0.51%

0.03

48

7

0.005

1.088

1.088

Accept

CAR (-9, -8)

-0.57%

0.04

48

7

0.005

-1.097

1.097

Accept

CAR (-8,-7)

-1.13%

0.06

48

7

0.008

-1.339

1.339

Reject

CAR (-7,-6)

-0.50%

0.04

48

7

0.006

-0.874

0.874

Accept

CAR (-6,-5)

0.11%

0.05

48

7

0.007

0.159

0.159

Accept

CAR (-5,-4)

-0.13%

0.04

48

7

0.006

-0.219

0.219

Accept

CAR (-4,-3)

-0.10%

0.03

48

7

0.004

-0.224

0.224

Accept

CAR (-3,-2)

0.09%

0.03

48

7

0.004

0.218

0.218

Accept

CAR (-2,-1)

0.12%

0.03

48

7

0.004

0.329

0.329

Accept

CAR (-1,0)

1.14%

0.05

48

7

0.007

1.582

1.582

Reject

CAR (0,1)

0.60%

0.05

48

7

0.008

0.756

0.756

Accept

CAR (1,2)

-0.58%

0.03

48

7

0.005

-1.159

1.159

Accept

CAR (2,3)

-0.39%

0.04

48

7

0.005

-0.737

0.737

Accept

CAR (3,4)

-0.47%

0.03

48

7

0.005

-1.006

1.006

Accept

CAR (4,5)

0.13%

0.04

48

7

0.005

0.243

0.243

Accept

CAR (5,6)

0.38%

0.03

48

7

0.005

0.780

0.780

Accept

CAR (6,7)

0.50%

0.04

48

7

0.005

0.947

0.947

Accept

CAR (7,8)

0.29%

0.04

48

7

0.006

0.499

0.499

Accept

CAR (8,9)

0.33%

0.03

48

7

0.005

0.664

0.664

Accept

CAR (9,10)

0.88%

0.04

48

7

0.005

1.686

1.686

Reject

CAR (-10,-1)

-0.48%

0.10

48

7

0.014

-0.341

0.341

Accept

CAR (0,10)

1.76%

0.09

48

7

0.013

1.322

1.322

Reject

CAR (-10,10)

1.28%

0.14

48

7

0.020

0.651

0.651

Accept

The above table shows the CAAR calculation for the 2-day, 10-day and 21-day window and their z-statistic.We note that the rejection of the null hypothesis in the cases CAAR (-8,-7), CAAR (-1,0), CAAR (9,10) and over the 10 day window after the announcement of the merger, CAAR (0,10) shows that these values of the CAAR calculated are significantly different from 0 at 10% LOS.

This implies that the shareholders of the acquiring company do not get any abnormal returns due to the merger announcement during the other time windows, but may gain abnormal returns during the time windows cases CAAR (-8,-7), CAAR (-1,0), CAAR (9,10) and over the 10 day window after the announcement of the merger, CAAR (0,10). This means that at 10% level of significance, the shareholders could have gained the excess return over these time windows by buying the firms’ stock and selling it again. The shareholders of the acquiring firm therefore are shown to gain post the announcement of the merger.

It should be noted that these results are obtained for a very broad level of significance, 10%, which is not regularly used.

Conclusion and Recommendations

Mergers have been the prime reason by which companies around the world have been growing. The inorganic route has been adopted by companies forced by immense competition, need to enter new markets, saturation in domestic markets, thrust to grow big and maximize profits for shareholders. In the changing market scenario it has become very important for firms to maximize wealth for shareholders. Many researchers have shown significant findings out of their research. The Hubris hypothesis in fact states that the announcement of a merger or acquisition does not lead to return for shareholders since the acquisition would only lead to transfer of the wealth from the bidding shareholders to the target shareholders. A number of studies have been done in various countries across the world to find out whether mergers and acquisitions create maximization of wealth for shareholders.

Empirical studies were done by SurujitKaur (2002) for a sample of 20 companies between the period 1997 and 2000 to study the financial performance of the acquiring firm 3 years before and after the merger. The study shows that the acquiring firm was not able to create enough wealth for shareholders post-acquisition. Another study was conducted by Beena (2004) which studied 115 manufacturing companies in the period 1995 and 2000. The study found out that the acquiring firms were not able to create significant wealth for its shareholders post-acquisition.

From the above research done in the past it can be seen that post-merger performance has been negative for the acquiring firm. To test this prevalent conclusion, this research was done. The idea was to also do a not sectoral analysis, but a combined analysis across sectors, to understand the effect of only mergers and acquisitions on the stock market returns, not the study of some particular sector.

For this study, all Mergers and Acquisitions taking place in India over the period 2005-13 were considered, across sectors, laying more emphasis on the following sectors:

Telecommunications

Oil and Gas

Banking

Aviation

Infrastructure

Since these are the sectors in which most Mergers and Acquisitions activity was seen over the last few years.

Taking a sample of 80 deals that took place over this period, the analysis was carried out.

The following conclusion was drawn:

This study of the wealth gains on announcement of the merger, to shareholders of the acquiring firm, and the acquired firm in India, shows that, on an average, and at a 5% level of significance, none of the two parties appear to enjoy significant wealth gains. The acquiring firm and the target firm shareholders do not seem to reap any such benefits, consistent with the findings of studies in other countries. The CAARs to the acquired firm shareholders are significantly higher than those for the acquiring firm shareholders. This is perhaps because, on average, the acquired firms are lagging behind in their industries in terms of financial performance. The expectation, on announcement of a merger, of the firm being merged with a better performing firm and being managed more capably leads to a positive revaluation in the market, resulting in wealth gains. On the other hand, the possibility of the acquirer being saddled with an under-performing acquisition, resulting in lower financial performance in future, leads to lower CAARs to the shareholders of the acquiring firm. On the other hand, when the same analysis was carried out at a 10% level of significance, it was seen that the acquired or target firms show significant value of CAARs over the 21 day event window, showing that shareholders’ of a target firm do benefit when the announcement of the merger is made. For acquiring firms, this value was significant for the period after the event, showing that wealth creation is possible for shareholders prior to the announcement of the merger. But 10% level of significance is rarely used, making these results not as reliable as the one with 5% level of significance.

First, the results strongly suggest that even though none of the two parties gains significantly, it is the targets who benefit comparatively in acquisitions: therefore, from a shareholder wealth creation standpoint it is better to be a seller than a buyer. More importantly, it should be kept in mind that managers considering acquisitions should be sensitive to the many factors that are related to wealth creation. These include regulatory changes in the macro environment, the competitiveness of the market for corporate control, tactics employed by the bidder (tender offer or merger), the mode of financing, and the type of acquisition, all of which jointly influence the wealth gains to shareholders. More specifically, target firm managers can maximize gains for their stockholders by avoiding stock-financed transactions or being acquired by a bidding firm in an unrelated industry. Moreover, tender offers should be preferred over mergers, whenever possible.

Limitations of the Study

The results should be considered in light of the following limitations.

It must be acknowledged that the results of this study have a generalizability problem, since only public companies listed on the BSE were examined.

The post acquisition period examined in this study was only two months. This may not seem adequate for gains to materialize following an acquisition, however as explained in the paper, extending the post-acquisition period would cause sample size problems.

Finally, when abnormal stock returns are analyzed, it should be kept in mind that the efficiency of the Bombay Stock Exchange plays a major role in the study.

It is mainly a stock market study and does not take into account accounting study or operating performance of the companies.

The study is sector agnostic, however it still consists of deals / companies belonging to the following sectors predominantly - Aviation, Financial Services, Telecommunications, Oil and Gas and Infrastructure.

Scope for Further Research

To make the study more comprehensive, other factors that can be taken into account are to carry it out in an event window around the actual merger, not just the announcement. Because in that case, it would be possible to even analyse the behavior of the stock markets towards the combined firm, and the real picture of the shareholders’ wealth gain after a merger or acquisition can be seen then.

Other recommendations can be to carry out further study to analyze the other factors like ROI, ROE, EPS, etc., in addition to the Share price of the Acquiring Companies to reap abnormal return. That is, a study of the operating performance of the company may be carried out to see if there is any gain in that regard, since the stock market being much more volatile in nature may not always give the clearest picture.

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