Globalization and liberalization
have led firms from emerging markets like India to become more aggressive and
opt for mergers and acquisitions (M&A) to fight the competitive battle. The
present study attempts to evaluate the impact of mergers and acquisitions on
the returns in the short run using detailed event study methodology.
The notable finding of the research
is that a market starts reacting prior to the announcement. The moment the
announcement information becomes public, investors start reacting and the stock
price jumps high, providing positive abnormal returns (ARs) to the investors.
However, post-announcement, a strong correction in the market price of the
acquiring company takes place and positive ARs do not sustain.
The findings of the study have the following implications for the investors:
1. ‘Earlier he
sells more he gains’ and ‘issuance of stock for M&A is not good news’.
2. An investor
can also earn substantial returns if the shares of the acquiring company are
purchased two days prior to the announcement day and sold two days after the
announcement day.
3. The
announcement of cross-border acquisitions provides much higher returns than
that for domestic. In addition, the cumulative abnormal returns (CARs) in the
case of cross-border acquisitions are permanent, while in the case of domestic
acquisitions they are temporary.
4. The
announcement of complete acquisitions of the target firm as a wholly-owned subsidiary
provides much higher returns than that for partial/majority control
acquisitions. In addition, the CARs in the case of complete acquisitions are
permanent, while in the case of partial/majority control acquisitions they are
temporary.
5. The announcement
of acquisitions financed with cash payment provides substantial returns.
This research draws the attention
of managers to consider cross-border as well as domestic acquisitions as an
option to strengthen their competitiveness.
They should think of cash as a mode
of payment to finance mergers as issuance of shares is bad news. The management
may acquire the target firm as a subsidiary and may absorb it with its own
operations later on.
M&A’s rapid growth in recent
years calls for research to analyse what drives firms to go for M&A and how
it affects firms and markets (Andrade, Mitchell, & Staffird, 2001;
Holmstrom & Kaplan, 2001). When an acquisition is announced, a considerable
amount of information is revealed about the potential transaction, which can be
used to assess the stock market reaction to an M&A announcement.
The effects of these announcements
appear to be a good indicator of future success. The security returns around
the announcement represent investors’ expectation of M&A benefits. Stock
market reactions to M&A announcements could help to predict M&A
profitability; moreover, short-term effects are of interests for immediate
trading opportunities they create. The most statistically reliable evidence on
whether M&A create shareholders’ wealth is documented by conducting event
studies.
The methodology is based on the
fundamental idea that stock prices represent the discounted value of firms’
future stream of profits. Hence, the change in the equity value of firms
observed due to stock market response to the announcement of M&A may be
considered as a measure of the (discounted) additional profits that they are
expected to accrue as a consequence of M&A (Duso, Gugler, & Yurtoglu,
2010). Various studies use event methodology to analyse the short-term effects
of an M&A (Asquith, 1983; Dennis & McConnell, 1986; Dodd, 1980;
Mitchell, Pulvino, & Stafford, 2004; Pettway & Yamada, 1986; Schipper
& Smith, 1987; Sicherman & Pettway, 1987; Schipper & Thompson,
1983).
The determinants of performance of
acquiring firms have also been extensively studied empirically. Most empirical
studies agree that the method of payment, size, and form of the target firm
acquired, geography of the target firm, etc., play an important role in
explaining acquiring firms’ stock return.
In this context, the present study
proposes to conduct an empirical research to investigate the short-term
performance of M&A. It attempts to gain new insights into the acquirers’
performance. As a result, the study would also provide an insight into the
validity of the synergy hypothesis for Indian corporates.
Read the complete article here.
—Taken from Impact of
Mergers and Acquisitions on Shareholders’ Wealth in the Short Run: An Event
Study Approach in Vikalpa:
The Journal for Decision Makers.
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