Effect of Merger

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A PROJECT REPORT ON

Effect of mergers and acquisition on the stock prices of acquiring firms

Submitted By,Syed Md Nahin Iquebal

Roll No-P/MN/R/09/177 PGPBM 2009-2011

Submitted To,Prof Jasbir Singh Matharu

International School of Business & Media, Kolkata Kolkata-700091

Submission Year: 2011.


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Declaration of the Guide:

This is to certify that the Project Work titled Effect of mergers and acquisition on the stock price of acquiring firms is a bonafide work of Syed Md Nahin Iquebal, Roll No:P/MN/R/09/177, Section: C , carried out in partial fulfillment for the award of PGPBM of ISB&M-Kolkata under my guidance. This project work is original and not submitted earlier for

the award of any degree / diploma or associate ship of any other Institution.

Place: Kolkata

Signature of the Guide:Date: 28.03.2011.Name the Guide: Prof Jasbir Singh Matharu.


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Acknowledgement:

A project work is never the work of an individual. It is more of a combination of ideas,

suggestions, contributions and work involving many individuals, text books, internet, journals,periodicals etc. Moreover, without the help and support of my project guide this mission wouldhave been far from accomplished.

I am sincerely indebted to my project guide Professor Jasbir Singh Matharu (ISB&M, Kolkata),for providing his valuable suggestions, constant encouragement, support and unwaveringconfidence, without which this project would not have been possible.

Besides, I also want to thank Professor Dibyendu Nandi (Academic Chairperson) to allow me towork on this project.

Last but not the least; I would like to thank Mr. Gobindo Pahari (Librarian) and Mr. SupriyoMukherjee (IT Lab faculty) for helping me collecting study materials from library and IT lab andall my friends for their encouragements.


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Executive summary:

We have observed that during the short period of 4-5 years during recession many Indiancompanies went for merger and acquisition not only inside India but also beyond the boundary,the amount of many deals were few of the highest in the global context.

I tried to track these happenings from an investor s point of view as every financial decisionshould be related to the betterment of shareholders values. I chose a few companies which wentthrough merger and acquisition at the time of recession ( 2007-2009) and tried measure the effectof merger and acquisition on their long term performance (2 years) and also tried to find out if there is any effect of recession on their performances.

To measure how different is the effect on the acquiring firm to the acquired firm, I also includeda case of stock price effect on the acquired firm.


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Table of Contents:

Background of the problem.................................................................... 7

1.0.Introduction...................................................................................... 8 - 15

1.1. What is Merger?...................................................................... 8 - 9

1.2. What is Acquisition? .................................................................. 9

1.3. Takeover ................................................................................... 9

1.4. De-merger ................................................................................... 10

1.5. Purpose of M&A ................................................................... .... 10 - 13

1.6. Types of merger........................................................................... 13 - 15

1.6.1. Vertical combination .................................................... 13 - 14

1.6.2. Horizontal combination .................................................. 14

1.6.3. Circular combination ..................................................... 14

1.6.4. Conglomerate combination ........................................... 15

1.7. Advantages of Mergers ............................................................ 15

2.0. Objectives ........................................................................................ 16

3.0 Methodology ................................................................................ 17

3.1. Data collection ................................................................... 17

3.4. Data processing .................................................................. 17

4.0 Findings and Analysis ....................................................................... 18 - 214.1. Hindalco and Novalis deal ................................................... 18

4.2. Tata motors with Jaguar and Land Rover ............................ 18 - 19

4.3. Ranbaxy acquired by Daiichi Sankyo ................................... 19

4.4. RIL and RPL .......................................................................... 20

4.5. Tata Steel acquiring Corus Steel ............................................. 20

4.6. HDFC acquiring Centurian Bank of Punjab ............................. 21

5.0. Conclusion ............................................................................................ 21 - 22

6.0. Limitations .............................................................................................. 22

7.0. Bibliography ............................................................................................ 23


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Background of the research:

Mergers are one of the most researched areas in finance, yet few basic issues still remained

unsolved. While most empirical research focuses on daily stock returns surroundingannouncement dates, a few studies also look in, at the long term effects. Some conclude thatthese kind of firms experience significantly negative abnormal returns over one to three years.These findings led Jense and Ruback (1983, p. 20) to remark these results are unsettlingbecause they are inconsistent with the market efficiency and suggests that the changes in stock

prices during takeovers overestimate the future efficiency gains from merger.

While working on the line of Jense and Ruback, prof. Anup Agarwal, Jeffery F Jaffe and G.NMandelker found that NYSE listed companies who went for M&A suffered significant loss of about 10% in next five years ( Post merger results of acquiring firms - The journal of Finance,

vol.XLVII, 1992).

Prof. Walter P Neely in his study on Banking Acquisitions: acquirer and shareholders return,studied the same effect on North American Banking mergers found that the results of big bank acquisitions are not matching with the acquisitions of small banks, even all the big bank acquisitions are not showing similar result. He conclude that it was partly because of themisevaluation done by the acquiring banks; but he was not definite in his conclusion.

A study on 98 large M&A of European bidding banks done by Patrick Beitel and Mark Wahrenburg showed that misevaluation results in negative stock performences.

Not much work was done in Indian context, I found only the work of prof P Srikanth Ayyar andVibhor Gupta some how touched the subject, but their work was more concentrated on the effectfrom companies perspective.

As I seen most of the research on the effect of M&A on stock price done in U.S and Europeanperspective I tried analyse is their findings are also true in the Indian context or not.


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1.0 Introduction:

We have been learning about the companies coming together to from another companyand companies taking over the existing companies to expand their business.

With recession taking toll of many Indian businesses and the feeling of insecurity surging

over our businessmen, it is not surprising when we hear about the immense numbers of corporate

restructurings taking place, especially in the last couple of years. Several companies have been

taken over and several have undergone internal restructuring, whereas certain companies in the

same field of business have found it beneficial to merge together into one company.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender

offers, & other forms of corporate restructuring. Thus important issues both for business decision

and public policy formulation have been raised. No firm is regarded safe from a takeover

possibility. On the more positive side Mergers & Acquisition s may be critical for the healthy

expansion and growth of the firm. Successful entry into new product and geographical markets

may require Merge rs & Acquisition s at some stage in the firm's development. Successful

competition in international markets may depend on capabilities obtained in a timely and

efficient fashion through Mergers & Acquisition's. Many have argued that mergers increase

value and efficiency and move resources to their highest and best uses, thereby increasing

shareholder value, which we will try to find in our observed cases. .

1.1 What is Merger?

Merger is defined as combination of two or more companies into a single company where

one survives and the others lose their corporate existence. The survivor acquires all the assets as

well as liabilities of the merged company or companies. Generally, the surviving company is the

buyer, which retains its identity, and the extinguished company is the seller.


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Merger is also defined as amalgamation. Merger is the fusion of two or more existing

companies. All assets, liabilities and the stock of one company stand transferred to Transferee

Company in consideration of payment in the form of:

Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes.

1.2 What is Acquisition?

Acquisition in general sense is acquiring the ownership in the property. In the context of

business combinations, an acquisition is the purchase by one company of a controlling interest in

the share capital of another existing company.

Methods of Acquisition:

An acquisition may be affected by

a) Agreement with the persons holding majority interest in the company management likemembers of the board or major shareholders commanding majority of voting power;

b) Purchase of shares in open market;

c) To make takeover offer to the general body of shareholders;

d) Purchase of new shares by private treaty;

e) Acquisition of share capital through the following forms of considerations viz. Means of

cash, issuance of loan capital, or insurance of share capital.

1.3 Takeover:

A takeover is acquisition and both the terms are used interchangeably.

Takeover differs from merger in approach to business combinations i.e. The process of

takeover, transaction involved in takeover, determination of share exchange or cash price and the


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fulfillment of goals of combination all are different in takeovers than in mergers. For example,

process of takeover is unilateral and the offeror company decides about the maximum price.

Time taken in completion of transaction is less in takeover than in mergers, top management of

the offeree company being more co-operative.

1.4 De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous terms signifying a

movement in the company.

1.5 Purpose of Mergers & Acquisitions:

The purpose for an offeror company for acquiring another company shall be reflected in

the corporate objectives. It has to decide the specific objectives to be achieved through

acquisition. The basic purpose of merger or business combination is to achieve faster growth of

the corporate business. Faster growth may be had through product improvement and competitive

position.

Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediary product;

2. To obtain economies of purchase in the form of discount, savings in transportation costs,

overhead costs in buying department, etc.;

3. To share the benefits of suppliers economies by standardizing the materials.


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(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities through more

intensive utilization of plant and resources;

2. To standardize product specifications, improvement of quality of product, expanding

3. Market and aiming at consumers satisfaction through strengthening after sale

Services;

4. To obtain improved production technology and know-how from the offered company .

5. To reduce cost, improve quality and produce competitive products to retain and improve

market share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;

2. To obtain a new market outlets in possession of the offeree;

3. To obtain new product for diversification or substitution of existing products and to

enhance the product range;

4. Strengthening retain outlets and sale the goods to rationalize distribution;

5. To reduce advertising cost and improve public image of the offeree company;

6. Strategic control of patents and copyrights.

(4) Financial strength:

1. To improve liquidity and have direct access to cash resource;

2. To dispose of surplus and outdated assets for cash out of combined enterprise;

3. To enhance gearing capacity, borrow on better strength and the greater assets backing;

4. To avail tax benefits;

5. To improve EPS (Earning per Share).


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(5) General gains:

1. To improve its own image and attract superior managerial talents to manage its affairs;

2. To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company s own developmental plans.

A company thinks in terms of acquiring the other company only when it has arrived at its

own development plan to expand its operation having examined its own internal strength where

it might not have any problem of taxation, accounting, valuation, etc. But might feel resourceconstraints with limitations of funds and lack of skill managerial personnel s. It has to aim at

suitable combination where it could have opportunities to supplement its funds by issuance of

securities, secure additional financial facilities, eliminate competition and strengthen its market

position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through

alternative type of combinations which may be horizontal, vertical, product expansion, market

extensional or other specified unrelated objectives depending upon the corporate strategies.

Thus, various types of combinations distinct with each other in nature are adopted to pursue this

objective like vertical or horizontal combination.


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words, in vertical combinations, the merging undertaking would be either a supplier or a buyer

using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the acquirer

company i.e.

1. It gains a strong position because of imperfect market of the intermediary products,scarcity of resources and purchased products;

2. Has control over products specifications.

1.6.2 Horizontal Combination :

It is a merger of two competing firms which are at the same stage of industrial process.

The acquiring firm belongs to the same industry as the target company. The mail purpose of such

mergers is to obtain economies of scale in production by eliminating duplication of facilities and

the operations and broadening the product line, reduction in investment in working capital,

elimination in competition concentration in product, reduction in advertising costs, increase in

market segments and exercise better control on market.

1.6.3 Circular combination :

Companies producing distinct products seek amalgamation to share common distribution

and research facilities to obtain economies by elimination of cost on duplication and promoting

market enlargement. The acquiring company obtains benefits in the form of economies of

resource sharing and diversification.


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1.6.4 Conglomerate Combination :

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi

Industries. The basic purpose of such amalgamations remains utilization of financial resources

and enlarges debt capacity through re-organizing their financial structure so as to service the

shareholders by increased leveraging and EPS, lowering average cost of capital and thereby

raising present worth of the outstanding shares. Merger enhances the overall stability of the

acquirer company and creates balance in the compan y s total portfolio of diverse products and

production processes.

1.7 Advantages of Mergers :

Mergers and takeovers are permanent form of combinations which vest in management

complete control and provide centralized administration which are not available in combinations

of holding company and its partly owned subsidiary. Shareholders in the selling company gain

from the merger and takeovers as the premium offered to induce acceptance of the merger or

takeover offers much more price than the book value of shares. Shareholders in the buying

company gain in the long run with the growth of the company not only due to synergy but also

due to boots trapping earnings.

Mergers and acquisitions are caused with the support of shareholders, manager s ad

promoters of the combing companies. The factors, which motivate the shareholders and

managers to lend support to these combinations and the resultant consequences they have to

bear, are briefly noted below based on the research work by various scholars globally.


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From the standpoint of shareholders:

Investment made by shareholders in the companies subject to merger should enhance in

value. The sale of shares from one company s shareholders to another and holding investment in

shares should give rise to greater values i.e. The opportunity gains in alternative investments.

Shareholders may gain from merger in different ways viz. From the gains and achievements of

the company i.e. through

(a) Realization of monopoly profits;

(b) Economies of scales;

(c) Diversification of product line;

(d) Acquisition of human assets and other resources not available otherwise;

(e) Better investment opportunity in combinations.

One or more features would generally be available in each merger where

shareholders may have attraction and favor merger.

Here our primary concern is to look into the matter from an investor in secondary markets point

of view and what will be his take on the merger decisions in his investment plans.

2.0 Objective

The objective of the study is to observe the stock price movement of the companies who

went for mergers and acquisitions in the period of global recession .The scope of the study is

restricted to Indian context only as we will be observing the situations in India even though the

acquired or the acquiring company situated in foreign country.


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3.0 Methodology

3.1 Data collection: All the data were collected from Nse India . All the related data for the

six considered company and of Nifty are taken from this site. From various mergers happened during the last 10 years , we have selected 6 cases which were

the biggest deals in India ( for simplification we choose one company from a particular industry

and to evaluate the results more specifically, we excluded companies which went for multiple

merger process (like Kingfisher airlines mergers with Jet airways and Deccan airways)).

3.2 Data processing : The collected data are divided in sub parts

a) short term (days during the merger process),

b) Before announcement of merger (1 year before merger date),

c) After announcement (1 year after merger date).

Then the data are processed and have calculated returns on which the analysis will take place.

We have calculated the mean average and also the standard deviation on the basis of the

calculated returns.

As most of our observed cases went through the period of World recession, to nullify its effect

we compared the companies performance with the performance of the indices (Nifty).


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4.0 Findings and Analysis :

4.1 Hindalco and Novalis deal :

Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group, a$28 billion multinational conglomerate. Hindalco was one of the world s leading producers of aluminum and copper. Their aluminum units across the globe encompassed the entire gamut of operations, from bauxite mining, alumina refining and aluminum smelting to downstreamrolling, extrusions, foils, along with captive power plants and coal mines. Hindalco wasstructured into two strategic businesses aluminum and copper with annual revenue of US $2.6billion.

Novelis was split from its parent company, Alcan Inc. (Alcan), the Canada-basedaluminum giant and set up as its subsidiary in January 2005. Novelis was the world leader inaluminum rolling, producing an estimated 19 per cent of the world's flat-rolled aluminumproducts. Its customers included major brands such as Agfa-Gevaert, Anheuser-Busch, Coca-Cola, Crown Cork & Seal, Ford, General Motors. It was globally positioned, operating in 11countries. The company reported revenue of around $10 billion. The company recycled morethan 35 billion used beverage cans annually. The company was No. 1 rolled products producer inEurope, South America and Asia, and the No. 2 producer in North America.The report came first on 2 nd January 2007 when Hindalco made their interest public for Novelis.Finally on 10 th of February both parties agreed on the deal which was amounted of $ 6 billion.

Findings :

return deviation

overall before after short term overall before aftershortterm

hindalco 0.04% 0.07% 0.01% -1.40% 2.98% 2.81% 3.13% 4.43%nifty 0.12% 0.15% 0.09% -0.04% 1.78% 1.65% 1.89% 1.26%

4.2 Tata motors with Jaguar and Land rover

On 4th June 2008, India-based Tata Motors Ltd. completed the acquisition of the two iconic

British brands - Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3

billion after six months of stand-off. Tata Motors stood to gain on several fronts from the deal.


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One, the acquisition would help the company acquire a global footprint and enter the high-end

premier segment of the global automobile market. After the acquisition, Tata Motors would own

the world's cheapest car - the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land

Rover. .

Findings :

return deviationoverall before after during overall before after during

tatamotors -0.28% -0.07% -0.49% -0.27% 3.13% 2.14% 3.87% 2.27%nifty -0.02% 0.17% -0.22% 0.22% 2.27% 1.59% 2.78% 1.76%

4.3 Ranbaxy acquired by Daiichi Sankyo

This deal was different from other cases discussed here as it is the only case where majority of

the shares in Indian company Ranbaxy was taken over by Japanese pharma giant Daiichi

Sankyo, but it is included to show the difference in effect on acquiring and acquired companies.

On 11/06/2008 Daiichi made the first bid for Ranbaxy. Pfizer gets into the the race to acquire

Ranbaxy on 18 th of that month, but finally on 7 th November Daiichi closed the deal by acquiring

63.92% of Ranbaxy by paying $ 4.5 billion to the Ranbaxy owners Sing family and other

holders.

Findings:

return deviation

average before aftershortterm average before after

shortterm

ranbaxy 0.03% 0.19% -0.14% 0.24% 3.76% 2.35% 4.80% 3.58%nifty 0.05% 0.05% 0.06% -0.74% 2.54% 2.03% 2.97% 1.75%


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4.4 RIL and RPL :

As opposed to other M&A situations discussed here, this deal entailed a pure share swap wherethe expected profitability depended on the movement of the price ratio of the two stocks. It was

the merger of the chemicals and petroleum unit of RPL to its parent company RIL. This stock swap deal of 1: 16 was announced on 27 th of February 2009 and it came into effect from 2 nd of May 2009. The estimated volume of the deal was estimated of about Rs. 1643 crore for whichRIL issued 6.92 crore new shares.

Findings :

return Deviationaverage before after short term average before after short term

ril -0.10% -0.21%0.01% -0.59% 4.08% 3.85%

4.29% 2.58%

nifty 0.01% -0.23%0.25% -0.55% 2.39% 2.69%

2.03% 1.63%

4.5 Tata steel acquiring Corus steel :

Tata Steel was 56th largest steel producer in the world with an annual crude steel productioncapacity of 6.8 Million Ton Per Annum (MTPA) with revenue of around $ 5 Billion in 2006-07.Corus was Europe's second largest steel producer with annual revenues of around 12 billion ($21.3 Billion) and a crude steel production of 18 MTPA, primarily in the UK and the Netherlands.The size of the deal agreed on 30 th January 2007 between two parties was $ 12.1 billion whichwas roughly the size of all outbound deals done by Indian firms together in last five years.

Findings :

return deviation

average before aftershortterm average before after

shortterm

tatasteel -0.11% 0.22% -0.44% -0.18% 3.92% 2.92% 4.70% 4.24%nifty -0.04% 0.12% -0.21% -0.63% 2.33% 1.85% 2.72% 4.11%


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4.6 HDFC acquiring Centurion Bank of Punjab :

HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of

Punjab (CBoP) for Rs 9,510 crore ($ 2.4 billion) in one of the largest merger in the

financial sector in India. CBoP shareholders will get one share of HDFC Bank for every 29

shares held by them.

After the merger HDFC now become the 7 th largest commercial bank in India.

Findings :

return deviationaverage before after short average before after short

hdfc 0.01% 0.23% -0.22% 0.10% 3.49% 2.55% 4.23% 3.49%nifty -0.04% 0.13% -0.22% 0.06% 2.34% 1.94% 2.67% 2.35%

5.0 Conclusion :

It is clear from the findings that all the acquiring firms posted negative returns in short termand only HDFC posted positive return( as it was the only firm in this project which was

acquired)as expected.

We could divide the deals on the basis of long term (2 year) stock performance in three

categories

A. Beat the index -RIL

This deal was long anticipated so there was no short term buzz, it was purely a case of betterintegration, so its shares moved almost in similar direction after the announcement as it wasbefore.None of the other companies able to perform better than what it was doing relative to theindex performance. HDFC and Hindalco gave almost matching or positive returns comparedto nifty but the were beating the index( better return than nifty) before the merger deals.


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B. No effect -HDFC and Hindalco.

While HDFC tried to increase its market share by the acquisition Hindalco went for Global

presence and front end business activity by these deals, so it was expected that the effect willtake some time to reflect on its stock prices, unfortunately it didn t in next one year.

C. Worse than index :Tata steel, Tata motors , Ranbaxy .

The reason behind their performance was the fact that they acquired or merged with companies

which were situated in countries which were hit by recession more than India ( U.K , Japan), so

it is natural that the stock performance of these companies will have to bear the heat of recessionmore, that s why they performed worse than t he index ; but among them Tata motors was the

worst performer as it was already performing bad and the reason behind its acquiring was more

emotional than Financial.

AS for the case of Ranbaxy which was the only acquired firm, the result was same as of the

acquiring firms because of the fact not only the recession but also the effect of US federal court

judgement against them in misbraned drug export in U.S which resulted in ban of a part of its

product line in U.S.A.

6.0 Limitations:

Though time frame was restricted to only recession time, it was difficult to observe all the

deals that took place during this time, so we have taken only the 6 biggest deals happened

during that time.


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7.0 Bibliography

Nseindia.com Google finance Official websites of

Tata motors Tata steel Ranbaxy HDFC Hindalco Novelis RIL

Research paper on merger by Mr. Vivhor gupta (RBS) and P Srikanth Ayyar. Short paper on mergers during recession by pwc. Explaining the M& A success in European bank mergers and acquisitions Patrick

Beitel and Mark Wahrenburg

Stock market driven acquisitions Andrei Shliefer and Robert W. Vishny. Post merger performance of acquiring firms Anup Agarwal, G N Mandelkar

Banking Ac quisitions Acquirer and target shareholders return W. P. Neely Performance of stock price driven acquisitions C Bouwman, K Fuller ( social science

research network, 2003).


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