Fms Of Merger And Acquisitions

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02 Nov 2017

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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

Name of Supervisor

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

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 51 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. 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.

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 (Ghosh and Das, 2003).

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 (Yadav and Kumar, 2005), on the other hand there are some examples in which mergers and acquisitions are entred into for purely qualitative reasons, which may be building a company’s profile or prestige (Malatesta, 1983).

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 news can 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.

The following table can give an idea about the changes that may happen in the stock prices of an acquiring company, on the day when the announcement of the merger or acquisition was made:-

Acquiring Company

Target Company

Movement in Stock Price

Daimler-Benz

Chrysler

+8%

Time Warner

AOL

+9%

Vodafone

Mannesmann

+6%

Air France

KLM

+4%

Source: Yahoo! Finance

However it should also be remembered that it is not a regular phenomena 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. (Scweiger, 2003).

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." (Jose, Nichols and Stevens, 1986). 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.

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

CAUSES OF FAILURE OF MERGERS AND ACQUISITIONS

Overpayment: This is very common cause of failure of acquisition & mergers. De Pamphilis D. (2005) found that overpayment often has destroys consequences. Overpayment leads to expectation of higher profitability which is not possible. Excessive goodwill as a result of overpaying needs to be written off which reduces the profitability of the firm.

Integration issues: Strau. (2007) studied that business cultures, work ethics, etc. needs to be flexible and adaptable. Inefficiencies or administrative problems are a very common occurrence in a merger which often nullifies the advantages of the mergers.

Faulty Strategic Planning and unskilled execution: Schuler, R.S. Jackson, S.E. Luo,. (2004): Faulty Strategic Planning and unskilled execution often leads to problems over expectation of strategic benefits is another area of concern surrounding mergers. These issues lead to failures of mergers. Mike Harrison (2001) found that planning is a crucial exercise that will help determine the success or failure of a merging organization. However, many merging organizations do not have adequate or complete integration and implementation plans in place. Only one out of five companies that have acquired another has developed a clear and satisfactory implementation plan.

Corporate Culture Differences: Irene Rodger. Business International states that poor communications and inability to manage cultural differences are the two main causes of failed mergers.

Maria Koul Cultural differences that cannot be resolved affect communications, decision-making, productivity and employee turnover at all levels of the organization. All the best laid plans – exhaustive analyses of strategies, marketing tactics, legal issues, etc. – can fall apart if the people cannot work together. If the two workforces fail to unite behind the strategic goals underlying the consolidation, even the best financial deals and most rigorous legal contracts fail to guarantee success.

Loss of Customers: Wayne R. Pinnell (2001) found that all companies need to remember: it’s the people who produce profits, represent the company, establish rapport with the customers, and, ultimately, are the ones that will make the combined company succeed."

Power Politics: Randall S. Schuler, Susan E. Jackson (2001) observed that there is a tendency to assume that power disputes are more common in the case of acquisitions than mergers, there is no such thing as "a merger of equals". Further, it was clear that the distribution of power was not equally spread out. "We felt like we were marrying up, and it was clear that they thought they were marrying down."

(Singh, SDITM, 2012)

Mergers And Acquisitions In India

Mergers and Acquisitions, as already mentioned are key forms of corporate restructuring. The mergers and acquisitions came into existence during the post independence period in India. But very few M&A took place in India prior to 1990s due to Industrial Development and Regulation Act 1951, FERA Act, MRTP Act, and due to the presence of a closed economy without any reforms. After 1990s, especially after the liberalization, privatization and globalization reforms in 1991, there was a great rise in domestic and global competition. This led to a big wave of M&A in India. Takeover cases started only in the year 1996 and then onwards this mode of M&A gained increased importance. The Tata Group, to quote an example, had 126 M&As deals between April 1998 and March 2008. The number of deals really underwent a rapid rise in the year 1999 with total of 1453 deals as compared to only 172 deals in 1998. The years 2000, 2007 and 2008 saw a decline in the deals by 22%, 2% and 24% respectively due to the global credit crisis in these years.

M&As in India had a decreasing trend from the year 2000 to 2008. The trends in Indian M&A, which recorded a rapid increase between 2003 and 2007 registering a compounded annual growth rate of 95% at $70 billion between these years. Though it dipped following the global crisis of 2008, it was only to recover soon to hit a fresh peak of $50 billion by 2010. The robust sector of Telecom, which with an innovative support from the regulatory authority saw a progressive growth post-liberalization, recorded the highest M&A activity during the year with an aggregate of $14.6 billion investment powered by the acquisition of Hutch Essar by Vodafone and Tata Tele buying the NTT Docomo of Japan. Oil & gas sector with $11.2 billion (Reliance Natural) and Pharma Sector with $ 6.24 billion led the charge of the M&A brigade. This underscored an announced not only India Inc's appetite for going global, but making M&A its critical tool of business strategy for survival and growth.

There has been a considerable shift seen since 2010 in the outlook of Indian companies which reconsidered M&A’s as one of their key growth strategies. During the year 2010, Indian companies were involved in a record total of 627 M&A deals, including both cross-border and domestic transactions. 283 of these deals, whose announcements included the transaction value, totaled a massive $ 65.9 billion which were significantly higher when compared to 2009 which witnessed a total of 413 M&A deals (including 183 deals with an announced value of $18.4billion). The manufacturing companies emerged as the most active dealmakers during 2010, led by JSW Steel acquiring a controlling 42% stake in Ispat Industries. M&A showed a significant decline during the period 2010 as global companies turned cautious in investing capital in the first six months of the financial year. With regard to outbound M&A, Indian companies faced significant challenges in raising finance – both locally and globally – to fund their acquisition plans in FY 2010. The challenging macro-economic environment raised concerns of valuation and also impacted the deal closure time.

Mergers And Acquisitions In India: The Latest Trends

With the increasing number of Indian companies opting for mergers and acquisitions in recent times, India is now one of the leading nations in the world in terms of mergers and acquisitions. Among the different Indian sectors that have been involved in mergers and acquisitions in recent times, telecom, finance, FMCG, construction materials, automobile industry and steel industry are worth mentioning. The situation of mergers and acquisitions in India has undergone a huge change in the last couple of years. In Indian corporate sector mergers and acquisitions of foreign companies by the Indian companies, or cross border acquisitions, have been the latest trend. There are different key factors like increasingly dynamic attitude of Indian entrepreneurs, buoyancy in the economy, recent favorable government policies, additional liquidity etc. behind the changing scenario of trends in mergers and acquisition in India. The IT and ITES sectors of India have already played a dominant role in global markets. The other Indian sectors are following the same trends. The increased participation of the Indian companies in the global corporate sector has further facilitated the merger and acquisition activities in India and led to its rampant growth.

The top 10 acquisitions made by Indian companies worldwide

(Singh, SDITM, 2012)

Some studies conducted on this subject, starting from the very early ones are mentioned in this section:-

The Impact of Merger Bids on the Participating Firms' Security Holders

PAUL ASQUITH and E. HAN KIM, 1982

This paper investigated whether merger bids have an impact on the wealth of the participating firms' bondholders and stockholders. It calculated Monthly and daily bond and stock returns relative to the announcement date of a merger bid for a sample of conglomerate mergers. The results showed that though the shareholders of target firms gained from a merger bid, no other security holders either gained or lost. To provide direct evidence on the existence of "diversification effects" and "incentive effects," the bondholders' returns dependence upon the correlation between the returns of the merging firms was tested and whether the size of the bondholders' and stockholders' returns in individual mergers are correlated was tested. The results were consistent with a capital market that efficiently resolves conflicts of interest between stockholders and bondholders.

A paired- comparison technique was used to calculate Monthly abnormal returns for the sample bonds using. Each sample bond was matched with a bond issued by a nonmerging firm with similar risk-return characteristics. The matching criteria used were: the bond rating as given by Standard and Poor's Bond Guide; the term-to-maturity; the coupon rate; and the classification of the bonds as industrial or utility bonds.

Additionally, the issuing firm of a matching bond must not have engaged in any major merger during the 48-month interval which surrounded the merger of the corresponding sample firm. Thus, each bond in the matching (or control) group had been thought of as a risk-adjusted index with which a similar bond issued by a merging firm could be compared. If the underlying risk-return characteristics of the two sets of bonds were identical except that the issuers of one set of bonds were involved in merger bids while the issuers of the other were not, then any difference in returns was considered an abnormal return which was attributable to the merger bid. All data for the matching bonds were collected from Standard and Poor's Bond Guide.

The following formula was used to calculate Monthly rates of return for each bond in the sample and the matching bond for the twelve months before and after the announcement date:

where

Pt = the market price of the bond at the end of month t;

C = the annual coupon payment per bond;

C/12 = the coupon earned for holding the bond one month; and

n = the number of months accrued toward the next coupon payment at the end of month t

In this paper the effect of merger announcements on both the stockholders and the bondholders of merging firms was examined. The investigation was restricted to those mergers which were classified as "conglomerate" by the Federal Trade Commission and to those firms which did not engage in multiple mergers.

Furthermore, the changes in stockholders' wealth were similar in both direction and magnitude to those reported by previous authors doing similar studies. These findings showed that the total synergistic gains of mergers (whether real or financial) do not depend on whether the merger is conglomerate or not.

The hypothesis that bondholders on average do not earn positive or negative abnormal returns could not be rejected by a closer examination of the security holders' returns. Thus, it was shown that if wealth transfers do occur, they are offset by other effects. The acquired firm's stockholders were the only claim holders to show abnormal gains, and their gains do not come at the expense of other security holders. This finding by itself did not necessarily imply that there are no "incentive effects" or "diversification effects"; it is possible that the two effects exist and simply cancel each other.

To provide more direct evidence for the existence of these effects, further tests were attempted to separate the "diversification effect" and the "incentive effect." Rank correlation tests were run to check whether bondholders' returns are a function of the correlation between the stock returns of the merging firms, and whether the size of the bondholders' and stockholders' returns in individual mergers are correlated. These tests that were run could not reject the hypotheses that the bondholders' returns are unrelated to either the correlation between the merging firms' stock or the stockholders' returns for the same merger. These findings were consistent with the hypothesis that mergers do not generate a "diversification effect," nor are they motivated by the "incentive effect."

Long-run Volatility and Risk around Mergers and Acquisitions

Sreedhar T. Bharath, Guojun Wu

University of Michigan, 2005

This paper studied the changes in volatility and risk of acquirers around mergers and acquisitions and tried to understand the determinants of those changes. It was found that there is a strong run-up in volatility and risk, that began four years before the merger. This pre-merger run-up was consistent with the hypothesis that M&As arise as a response to industry shocks. It was found that for a period of about one year after the merger the cross-sectional average of the volatility measures continued to increase. Beyond that the systematic volatility and beta began to decline. However, idiosyncratic volatility continued to increase for the next two years.

Data Set – Deals Analyzed

A total of 51 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:

Acquirer

Target

A-Date

Vedanta Resources PLC

Cairn India Ltd

8/16/2010

Oil & Natural Gas Corp Ltd

Imperial Energy Corp PLC

8/26/2008

Reliance Industries Ltd

Reliance Petroleum Ltd

3/2/2009

Indian Oil Corp Ltd

Oil India Ltd

9/16/2009

Reliance Industries Ltd

EIH Ltd

8/30/2010

Loyz Energy Ltd

Interlink Petroleum Ltd

4/29/2010

Aegis Logistics Ltd

Shell Gas LPG India Pvt Ltd

12/22/2009

Oilex Ltd

Bharat Petroleum Corp Ltd

6/5/2008

GAIL India Ltd

Oil & Natural Gas Corp Ltd

3/16/2009

Shree Renuka Sugars Ltd

Hindustan Petroleum Corp Ltd

9/11/2008

Kingfisher Airlines Ltd

Kingfisher Airlines Ltd/Old

1/31/2008

Kal Airways Pte Ltd

SpiceJet Ltd

6/11/2010

GVK Power & Infrastructure Ltd

Bangalore International Airport Ltd

8/22/2011

Invesco Ltd

SpiceJet Ltd

7/15/2008

GTL Infrastructure Ltd

Tower portfolio

1/14/2010

GTL Infrastructure Ltd

Chennai Network Infrastructure Ltd

12/16/2010

IFCI Ltd

GTL Infrastructure Ltd

7/21/2011

GMR Infrastructure Ltd

Malaysian Airline System Bhd

2/27/2009

NTT DOCOMO Inc

Tata Teleservices Ltd

11/12/2008

Axiata Group Bhd

Idea Cellular Ltd

6/25/2008

Telenor ASA

Unitech Wireless Pvt Ltd

10/29/2008

Reliance Industries Ltd

Infotel Broadband Services Ltd

6/11/2010

Singapore Telecommunications Ltd

Bharti Telecom Ltd

10/30/2009

Piramal Enterprises Ltd

Vodafone India Ltd

8/10/2011

TV18 Broadcast Ltd

Eenadu Group

1/3/2012

HDFC Bank Ltd

Centurion Bank of Punjab Ltd

2/23/2008

ICICI Bank Ltd

Bank of Rajasthan

5/18/2010

Axis Bank Ltd

Enam Securities Pvt Ltd

11/10/2010

Sumitomo Mitsui Financial Group Inc

Kotak Mahindra Bank Ltd

6/30/2010

General Atlantic LLC

IndusInd Bank Ltd

3/1/2011

Reliance Industries Ltd

Indian Petrochemicals Co

3/10/2007

Aban Offshore Ltd

Sinvest ASA

1/9/2007

Jet Airways India Ltd

Jet Lite India Ltd

4/12/2007

Reliance Communications Ltd

Yipes Communications Inc

7/16/2007

Wipro Ltd

Unza Holdings Ltd

7/6/2007

Sterling Infotech Group

Tata Teleservices Maharashtra Ltd

2/27/2006

Aditya Birla Nuvo Ltd

Minacs Worldwide Inc

6/23/2006

United Breweries Holdings Ltd

Kingfisher Airlines Ltd

6/20/2007

ICICI Bank Ltd

Sangli Bank Ltd

12/9/2006

Bharti Airtel Ltd

Network i2i Ltd

1/23/2007

Shareholders

GTL Ltd

8/14/2007

BNP Paribas SA

Sundaram Finance Ltd

5/9/2007

Kotak Mahindra Bank Ltd

Kotak Mahindra Capital Co Ltd

3/16/2006

Indian Overseas Bank

Bharat Overseas Bank Ltd

2/14/2006

IDBI Bank Ltd

United Western Bank Ltd

9/13/2006

Istithmar World PJSC

SpiceJet Ltd

2/9/2007

Siva Ventures Ltd

Sahara One Media & Entertainment Ltd

5/22/2006

Tata Communications Ltd

Direct Internet Ltd

5/8/2006

Spanco Ltd

Omnia BPO Services Ltd

6/7/2007

Oriental Bank of Commerce

HSBC Holdings PLC

3/5/2007

Bank of Baroda

Andhra Bank

11/19/2007

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).

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.

The values of α1 and β1 for the target companies are given below:

Target Company

α1

β1

Tata Teleservices Ltd

-0.0142

0.0374

Idea Cellular Ltd

-0.0005

0.5091

Unitech Wireless Pvt Ltd

-0.0049

1.3493

Bank of Rajasthan

0.0042

0.3157

Kotak Mahindra Bank Ltd

0.0001

0.9777

IndusInd Bank Ltd

-0.0021

1.6372

Cairn India Ltd

0.0020

1.1249

Oil India Ltd

-0.0042

1.7531

EIH Ltd

0.0034

-0.0543

Interlink Petroleum Ltd

0.0032

1.1624

Bharat Petroleum Corp Ltd

-0.0052

0.6718

Oil & Natural Gas Corp Ltd

0.0033

0.5981

Hindustan Petroleum Corp Ltd

0.0026

0.7202

Kingfisher Airlines Ltd/Old

0.0120

0.7802

SpiceJet Ltd

-0.0014

1.1720

SpiceJet Ltd

-0.0067

0.8978

GTL Infrastructure Ltd

-0.0131

1.5684

Tata Teleservices Maharashtra Ltd

-0.0025

0.3830

Kingfisher Airlines Ltd

0.0068

1.2570

GTL Ltd

0.0045

0.3975

Sundaram Finance Ltd

-0.0014

0.1159

SpiceJet Ltd

0.0062

0.2845

Sahara One Media & Entertainment Ltd

0.0023

0.2882

Andhra Bank

-0.0017

0.7437

Similarly, values of α1 and β1 for acquiring companies are given below:

Acquiring Company

α1

β1

Reliance Industries Ltd

0.0003

1.2502

Piramal Enterprises Ltd

0.0002

0.5097

TV18 Broadcast Ltd

-0.0051

0.3377

HDFC Bank Ltd

-0.0016

0.1320

ICICI Bank Ltd

0.0005

1.5670

Axis Bank Ltd

-0.0009

1.2932

Oil & Natural Gas Corp Ltd

0.0064

0.7370

Reliance Industries Ltd

0.0049

0.7758

Indian Oil Corp Ltd

0.0022

0.2084

Reliance Industries Ltd

-0.0020

0.9465

Aegis Logistics Ltd

0.0063

0.4459

GAIL India Ltd

-0.0005

0.0516

Shree Renuka Sugars Ltd

0.0049

1.0495

Kingfisher Airlines Ltd

0.0120

0.7802

GVK Power & Infrastructure Ltd

-0.0029

1.3000

GTL Infrastructure Ltd

-0.0005

-0.2733

GTL Infrastructure Ltd

-0.0009

0.3203

IFCI Ltd

-0.0011

1.2622

GMR Infrastructure Ltd

0.0088

0.2704

Reliance Industries Ltd

-0.0024

1.1251

Aban Offshore Ltd

0.0017

0.1036

Jet Airways India Ltd

-0.0002

1.0201

Wipro Ltd

-0.0021

0.5483

Aditya Birla Nuvo Ltd

-0.0028

0.6406

United Breweries Holdings Ltd

0.0113

1.1355

ICICI Bank Ltd

0.0045

0.6694

Bharti Airtel Ltd

0.0022

1.2942

Kotak Mahindra Bank Ltd

-0.0036

1.3009

Indian Overseas Bank

0.0018

0.5043

IDBI Bank Ltd

-0.0009

1.0364

Tata Communications Ltd

0.0016

0.4589

Spanco Ltd

0.0079

0.4480

Oriental Bank of Commerce

-0.0022

1.1333

Bank of Baroda

0.0017

1.1167

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 companies are given below:

Target Company

α2

β2

Tata Teleservices Ltd

0.0029

-0.0311

Idea Cellular Ltd

-0.0016

0.8329

Unitech Wireless Pvt Ltd

-0.0058

0.7476

Bank of Rajasthan

0.0035

-0.3996

Kotak Mahindra Bank Ltd

0.0200

2.9452

IndusInd Bank Ltd

0.0012

1.2175

Cairn India Ltd

-0.0017

0.5186

Oil India Ltd

-0.0024

-0.1499

EIH Ltd

-0.0039

0.2551

Interlink Petroleum Ltd

0.0033

0.5935

Bharat Petroleum Corp Ltd

0.0031

1.0474

Oil & Natural Gas Corp Ltd

0.0073

-0.0146

Hindustan Petroleum Corp Ltd

0.0028

0.4278

Kingfisher Airlines Ltd/Old

-0.0010

-0.1814

SpiceJet Ltd

0.0042

0.5292

SpiceJet Ltd

-0.0039

1.3508

GTL Infrastructure Ltd

-0.0045

0.5974

Tata Teleservices Maharashtra Ltd

-0.0028

0.3217

Kingfisher Airlines Ltd

0.0001

0.5864

GTL Ltd

0.0006

0.5209

Sundaram Finance Ltd

0.0027

0.6529

SpiceJet Ltd

-0.0027

0.2523

Sahara One Media & Entertainment Ltd

-0.0005

-0.3439

Andhra Bank

-0.0017

0.1233

Similarly, results for acquiring companies are given below:

Acquiring Company

α1

β1

α2

β2

Reliance Industries Ltd

0.0003

1.2502

-0.0029

0.8334

Piramal Enterprises Ltd

0.0002

0.5097

0.0005

0.2670

TV18 Broadcast Ltd

-0.0051

0.3377

-0.0018

0.1820

HDFC Bank Ltd

-0.0016

0.1320

0.0011

1.0453

ICICI Bank Ltd

0.0005

1.5670

0.0004

1.7526

Axis Bank Ltd

-0.0009

1.2932

0.0000

1.4423

Oil & Natural Gas Corp Ltd

0.0064

0.7370

-0.0007

0.7920

Reliance Industries Ltd

0.0049

0.7758

0.0112

-0.0042

Indian Oil Corp Ltd

0.0022

0.2084

-0.0110

0.3864

Reliance Industries Ltd

-0.0020

0.9465

-0.0002

0.9825

Aegis Logistics Ltd

0.0063

0.4459

-0.0020

1.1094

GAIL India Ltd

-0.0005

0.0516

0.0038

0.0463

Shree Renuka Sugars Ltd

0.0049

1.0495

-0.0032

1.1789

Kingfisher Airlines Ltd

0.0120

0.7802

-0.0010

-0.1814

GVK Power & Infrastructure Ltd

-0.0029

1.3000

-0.0095

0.9611

GTL Infrastructure Ltd

-0.0005

-0.2733

-0.0016

0.1430

GTL Infrastructure Ltd

-0.0009

0.3203

-0.0023

0.4088

IFCI Ltd

-0.0011

1.2622

-0.0056

1.5659

GMR Infrastructure Ltd

0.0088

0.2704

0.0177

-0.1705

Reliance Industries Ltd

-0.0024

1.1251

0.0005

0.7247

Aban Offshore Ltd

0.0017

0.1036

0.0075

0.9643

Jet Airways India Ltd

-0.0002

1.0201

0.0015

0.5189

Wipro Ltd

-0.0021

0.5483

-0.0035

0.7167

Aditya Birla Nuvo Ltd

-0.0028

0.6406

0.0030

0.0208

United Breweries Holdings Ltd

0.0113

1.1355

0.0051

1.4888

ICICI Bank Ltd

0.0045

0.6694

0.0012

1.3155

Bharti Airtel Ltd

0.0022

1.2942

0.0032

1.0394

Kotak Mahindra Bank Ltd

-0.0036

1.3009

-0.0033

-0.3304

Indian Overseas Bank

0.0018

0.5043

-0.0032

0.5825

IDBI Bank Ltd

-0.0009

1.0364

0.0025

0.2865

Tata Communications Ltd

0.0016

0.4589

-0.0006

0.8565

Spanco Ltd

0.0079

0.4480

-0.0025

0.9370

Oriental Bank of Commerce

-0.0022

1.1333

0.0031

1.6899

Bank of Baroda

0.0017

1.1167

0.0013

0.3832

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. A snapshot of this is presented below, for the target companies and for a window of day -3 to +3:

And similarly for acquiring companies:

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 values are tabulated below:

Window

Target

Acquiring

CAR (-10,-9)

0.003108

0.00274449

CAR (-9, -8)

0.017739

-0.00927026

CAR (-8,-7)

3.35E-05

-0.01234567

CAR (-7,-6)

0.013606

-0.00191256

CAR (-6,-5)

0.017187

0.007612

CAR (-5,-4)

-0.00123

0.00223514

CAR (-4,-3)

-0.00821

-0.00641746

CAR (-3,-2)

0.008952

-0.00616805

CAR (-2,-1)

0.01617

-0.00061041

CAR (-1,0)

-0.00048

0.01604216

CAR (0,1)

0.00218

0.00772875

CAR (1,2)

0.012801

-0.00993434

CAR (2,3)

0.028905

-0.00495963

CAR (3,4)

0.010307

-0.00455629

CAR (4,5)

0.000891

-0.00116043

CAR (5,6)

-0.00456

0.0036301

CAR (6,7)

-0.01068

0.00879889

CAR (7,8)

-0.00177

0.00282442

CAR (8,9)

-0.00171

0.00012678

CAR (9,10)

-0.00289

0.00856877

This can be shown graphically as follows:

For target companies:

For acquiring companies:

These 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 shown as follows:

Window

Target

Acquiring

CAR (-10,-9)

0.048418

0.04841841

CAR (-9, -8)

0.062389

0.06238874

CAR (-8,-7)

0.089878

0.08987829

CAR (-7,-6)

0.079458

0.07945803

CAR (-6,-5)

0.057368

0.05736771

CAR (-5,-4)

0.043844

0.04384385

CAR (-4,-3)

0.104893

0.10489315

CAR (-3,-2)

0.06948

0.06948047

CAR (-2,-1)

0.121248

0.12124816

CAR (-1,0)

0.058355

0.05835482

CAR (0,1)

0.068749

0.06874927

CAR (1,2)

0.097909

0.09790895

CAR (2,3)

0.08111

0.08111047

CAR (3,4)

0.057968

0.05796833

CAR (4,5)

0.053714

0.05371391

CAR (5,6)

0.042369

0.04236858

CAR (6,7)

0.051455

0.05145459

CAR (7,8)

0.067391

0.0673911

CAR (8,9)

0.032299

0.03229919

CAR (9,10)

0.046044

0.04604434

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 are as follows:

Window

Avg Target

Avg Acquiring

SD Target

SD Acquiring

CAR (-10,-1)

0.028285075

-0.009017051

0.12900176

0.129001761

CAR (0,10)

0.018285926

0.01762891

0.18873597

0.188735965

CAR (-10,10)

0.046571001

0.008611859

0.24207447

0.242074471

T-test

To test the significance,

Null hypothesis: Ho: Merger & Acquisition announcements have no significant impact on stock returns

Alternative hypothesis: Ha: Merger & Acquisition announcement have a significant impact on stock returns.

The level of significance used at 5% and the critical value is 1.96

The results obtained from the t-test are illustrated below:

TARGET COMPANIES

This analysis 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.

The results show that the 21 day CAAR (denoted as CAAR over day -10 to day 10) is -4.66% for target companies, which is significantly different from zero. The 10 day Cumulative Average Abnormal Return before the announcement (CAAR over day-10 to day-1) is 2.83% which is significantly different from zero. The 10 day Cumulative Average Abnormal Return after the announcement (CAAR over day 1 to day 10) is 1.83% which is less significant as compared to the other two values.

ACQUIRING COMPANIES

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.

Similarly, in case of acquiring companies, the 21 day CAAR (denoted as CAAR over day -10 to day 10) is 0.86%, which is very insignificantly different from zero. The 10 day Cumulative Average Abnormal Return before the announcement (CAAR over day-10 to day-1) is -0.9% which is a negative value showing the negative sentiment before the event. The 10 day Cumulative Average Abnormal Return after the announcement (CAAR over day 1 to day 10) is 1.76% which is more significant as compared to the other two values, and hence shows the betterment of sentiment after the event has taken place, i.e. announcement of the merger or acquisition.

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

Merger & Acquisition announcements have no significant impact on stock returns

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 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.

Empirical studies were done by Surujit Kaur (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 51 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.

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 macroenvironment, 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.

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.

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.

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