Post Merger Performance of Acquiring Firms from Different Industries Finance Essay


1.1 OBJECTIVE

A survey among Indian corporate managers in 2006 by Grant Thornton found that Mergers &

Acquisitions are a significant form of business strategy today for Indian Corporate. The three main objectives behind any M&A transaction, for corporate today were found to be: • Improving Revenues and Profitability • Faster growth in scale and quicker time to market • Acquisition of new technology or competence The overall Objectives of the research is to try and show the quantities approach towards pre and post merger and acquisition of 3 different sector of industry, according to:- Share price difference Price earning Ratio Earnings per share Profitability. .

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1.2 AIMS

To analysis the financial statement and Investment ratio of a company or sector during pre and post mergers. (Where they were and where they are).

LITERATURE REVIEWS

In the last four decades, there were ample number of studies on merger and acquisitions and numerous of theories have been proposed and tested for observed corroboration (Mantravadi, 2008). In an article by Canyon et. al, 2000, merger activity of this form has implications for corporate governance. Although the shareholders may gain from such breach of trust, whereas other stakeholders may suffer and the net consequences are far from clear. While Pillof et.al, 1996, argues, that mergers and acquisition activity results in overall benefits to shareholder when the consolidated post- merger firm is more valuable than the two different entities (pre-merger). Researchers have studied the economic impact of mergers and acquisitions on industry consolidation, returns to shareholders following mergers and acquisitions, and the post-merger performance of companies. Several measures have been suggested for analysing the success of mergers. Such measures have included both short term and long-term impacts of merger announcements, effects on shareholder returns of aborted mergers hostile takeover attempts and open offers etc.

3. METHODOLOGY

In the effect of merger, this research will calculate a set of financial ratios such as share price difference, price earning, liquidity ratio, debt ratio, market ratios, earning per share, profitability ratios etc, these financial ratios were computed on the basis of pre and post mergers (3 years each). Financial ratios will help the firm to analyse their position. These ratios are also useful to estimate the complete financial position of a firm or an organisation. (Megginson et. al, 2008, p46-51). The post-merger performance will be comparing with the pre-merger performance and tested for significant differences, using paired “t” test. Further, companies in the sample should not have been engaged in further mergers/acquisitions within four years after the merger under study. A list of companies involved in mergers during 1995-2006 will be compiling from various sources like business magazines, investment web sites, web sites of the BSE and NSE, SEBI’s web site (for details of companies making open offers for takeovers), and databases of Capitoline and Prowess. Merger cases where at least two years of data for pre-merger period and at least four years data for post-merger period was not available were removed from the study sample.

4 . METHOD

Data Collection and Analysis

4.1 Data collection

Data on operating performance ratios for up to three years prior and three years after the acquisition year for each acquiring company in the sample was extracted from Prowess database of CMIE. The sample list of firms was further divided into industry-wise sub-samples (for significant sample sizes).

4.2 Data analysis

Pre-merger and post-merger operating performance ratios were estimated and the averages computed for the entire set of sample firms, which have gone through mergers during the period 1995 to 2006. The average ratios for each of the industry sub-samples were also computed. Average pre merger and post merger financial performance ratios were compared to see if there was any statistically significant change in operating performance due to mergers, using “paired two sample t-test” at confidence level of 0.05.

5. PERSONAL SUITABILITY

5.1 Research background

The researcher is graduated from Pune University with commerce as background in 2009 with first class with distinction. During the 3 years of bachelor degree, the researcher undertook various subjects such as accounting, costing, economics, etc. This will help the researcher to write the dissertation on the above topic.

5.2 Present position

The researcher’s currently studying in master’s course on management in John Moores University. This is a compulsory module in order to proceed to the dissertation module. The researcher is also studying finance in another module, which help him to write about the above topic.

6. REFERENCES

Alston, P. (2002) ‘Resisting the Merger and Acquisition of Human Rights by Trade Law: A Reply to Peterrmann’, EJIL, Vol.13 4 pp. 815-844. Andrade, G. Et al (2001) ‘New Evidence and Perspectives on Mergers’, The Journal of Economic Perspectives, Vol. 15 2, pp. 103-120. Baker, M. and Savasoglu, S. (2002) ‘Limited Arbitrage in Mergers and Acquisitions’, Journal of Financial Economics, Vol. 64, pp. 91-115. Barkoulas, J.T. et. al ‘Waves and Persistence in Merger and Acquisition Activity’, Berger, A.N. et. al(1997) ‘The Effect of Bank merger and acquisitions on Small Business lending’. Brockbank, W. (1999) ‘If HR Were Really Strategically Proactive: Present and Future Directions in HR’s Contribution to Competitive Advantage, Human Resources Management, Vol. 34 4 pp.337-352. Cartwright, S. and Schoenberg, R. (2006) ’30 years of Mergers and Acquisition Research: Recent Advances and Future Opportunities’, British Journal of Management, vol.17 pp.S1-S5. Conyon, M. et al (2000) ‘The Impact of Mergers and Acquisitions on Company Employment in the United Kingdom’ Centre for Research on Globalisation and Labour Markets. Hennart, J. And Reddy, S. (1997) ‘The Choice Between Mergers/Acquisitions and Joint Ventures: A Case of Japanese Investors in the United States’, Strategic Management Journal, Vol. 18, pp. 1-12. Holmstrom, B. and Kaplan, S.N. (2001) ‘Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s’, The Journal of Economic Perspectives, Vol. 15 2, pp. 121-144. Jovanovic, B. and Rousseau, P.L. (2002) ‘The Q-Theory of Mergers’, National Bureau of Economic Research. Loughran, T. and Vijh, A.M.(1997) ‘Do Long-Term Shareholders Benefit From Corporate Acquisitions?’, The Journal of Finance, Vol. 52 5 pp. 1765 – 1790. Mantravadi, P. and Reddy, A. V. (2008) ‘Post-Merger Performance of Acquiring Firms from Different Industries in India’, International Research Journal of Finance and Economics, Vol. 22. Megginson, W. L. and Smart, S. (2008). Corporate Finance. Cengage learning publication London. P.46-51. Moeller, S. B.et al (2003) ‘Wealth destruction on a massive scale? A study of acquiring-firm returns in the recent merger wave’. Nonako, I. and Toyama, R. (2002) ‘A Firm as a Dialectical Being: Towards a Dynamic Theory of a Firm’, Industrial and Corporate change, Vol. 11 5, pp. 995-1009. Officer, M. S. (2002), ‘Termination Fees in Mergers and Acquisitions’. Pilloff, S.J. and Santomero, A.M. (1996) ‘The Value Effects of Bank Mergers and Acquisitions’, Financial Institutions Centre. Rossi, S. and Volpin, P.F.(2004) ‘Cross-Country Determinants of Mergers and Acquisitions’, Journal of Financial Economics, Vol. 74, pp. 277-304. Shleifer, A. and Vishny, R.W. (2003) ‘Stock Market Driven Acquisitions’, Journal of Financial Economics, Vol. 70, pp. 295-311. Thornton, G. (2006) ‘The M&A and Private Equity Scenario’ Wen, W. Et. al (2005) ‘A Hybrid Knowledge-Based Decision Support System for Enterprise Mergers and Acquisitions’, Expert System with Applications, Vol. 28, pp.569-582. Worthington, A.C. (2004) ‘Determinants of Merger and Acquisition Activity in Australian Cooperative Deposit-Taking Institutions’, Journal of Business Research, Vol. 57 1 pp. 47-57.

7. APPENDICES

7.1 APPENDIX 1

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