Mergers and Acquisitions: A Study of Financial Performance, Motives and Corporate Governance

277 Pages·2016·4.53 MB·English

by  Neelam Rani

India Studies in Business and Economics
Neelam Rani
Surendra Singh Yadav
Pramod Kumar Jain
Mergers
and
Acquisitions
A Study of Financial Performance,
Motives and Corporate Governance
India Studies in Business and Economics
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More information about this series at http://www.springer.com/series/11234
Neelam Rani Surendra Singh Yadav
(cid:129)
Pramod Kumar Jain
Mergers and Acquisitions
A Study of Financial Performance, Motives
and Corporate Governance
123
Neelam Rani PramodKumar Jain
Indian Institute of ManagementShillong Department ofManagement Studies
Shillong,Megalaya Indian Institute of Technology Delhi
India NewDelhi
India
Surendra SinghYadav
Department ofManagement Studies
Indian Institute of Technology Delhi
NewDelhi
India
ISSN 2198-0012 ISSN 2198-0020 (electronic)
India Studies inBusiness andEconomics
ISBN978-981-10-2202-9 ISBN978-981-10-2203-6 (eBook)
DOI 10.1007/978-981-10-2203-6
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Foreword
MergersandAcquisitions(M&A),asmentionedbyRani,YadavandJain,areways
‘togainaccesstonewresourcesandnewmarkets’.Inamerger,twocompaniesare
combined and in an acquisition a company takes over another company. Both the
processes assume that ‘two separate companies together create more value com-
pared to being on an individual stand’. In India, in post liberalization era, many
companies have adopted M&A as a strategy to grow with the expectation of
improving their competitiveness in the global market. In their current volume on
Mergers and Acquisitions, Rani, Yadav and Jain, through rigorous research
methodology, examine the experiences that the Indian companies have gone
through in adopting M&A as a strategy for expansion and improving competi-
tiveness. In particular, the study examines:
(cid:129) Abnormal returns to the shareholders of acquiring firms, if any, on the
announcement of M&A decisions offirms;
(cid:129) Long-term financial performances of the firms adopting M&A strategy;
(cid:129) Management views why Indian firms adopt M&A as a part of their corporate
strategy; and
(cid:129) CorporateGovernanceoffirmsanditsshorttermandlongtermimpactsonfirms
adopting M&A strategy.
The authors of the volume consider M&A to be very significant in corporate
finance.InrespondingtotheusualquestionwhetherornotM&Aresultinpositive
returns, the study shows evidence that the share holders get positive abnormal
returnsonthedaythefirmsannouncetheirM&Adecisions.Theshareholdersalso
get abnormally high returns over multiday period. The study suggests that M&A
create wealth for the shareholders.
The empirical evidences show that the profitability of Indian firms in the post
M&A period has been higher than that over the pre M&A period. The authors
suggestthat ithasbeentheimpact ofM&A. ThusM&A isanappropriatewayfor
expansions of firms in India. The authors could have examined the behavior of
v
vi Foreword
value addition per employee to assess to what extent firms’ competitiveness has
improved after M&A.
In assessing the management views on why Indian firms adopt M&A as a
strategic tool for firms, the authors did a survey among the Finance Directors of
firmswhichhavegoneforM&A.Toachievesynergyiswhyprimarilyfirmsgofor
M&A.Thenexttworeasonsaretoconsolidateandtoadoptastrategyforinorganic
growth.
Corporategovernanceisakeytobuildingtrustofinvestorsintheeconomy.The
authors’viewthatcorporategovernancehasanimpactonM&Ainfirms.Toassess
corporate governance in a firm, they propose a corporate governance index. They
haveshownhowthisindexwouldbeusedinassessingtheimpactofthecorporate
governance in firms on performance of M&A. The computation of corporate
governance as suggested by the authors involves certain scoring methods. It is not
clear how the picture would get affected if the scoring mechanism is changed.
An empirical study on measuring impact of mergers and acquisitions on
financialperformance,motivesandimpactofcorporategovernanceonperformance
of acquiring firms is really desirable academic exercise. The authors have done a
comprehensivestudy,probablyapioneeringstudy,ontheexperienceoffirmswho
havegoneforM&Aasastrategictoolforgrowthandexpansion.Theauthorshave
adopted a very rigorous approach for the study. The conclusions are based on
precise statistical tools. The insights the authors bring out from the study are
significantandwouldbeofimmenseusetothepolicymakersandtothefirmswho
would consider mergers and acquisitions as strategic tools. I am sure the study
wouldinspiremoreresearchonM&AexperienceinIndiaandbringmoreinsightso
that M&A becomes an effective strategic tool for Indian firms.
Dr. Neelam Rani, Prof. Surendra Singh Yadav and Prof. Pramod Kumar Jain
deserve complements of all the researchers in corporate finance for leading this
research effort. All those associated with the publication of this book also deserve
appreciation.
Prof. Jahar Saha
Former Director
Indian Institute of Management Ahmedabad
India
Preface
GlobalizationandliberalizationhaveledfirmsfromemergingmarketslikeIndiato
gainaccesstonewresourcesandnewmarkets.Twoofthestrategiesofthisaccess
are mergers and acquisitions as they increase revenues, reduce costs and make the
firmsgloballycompetitive.Oflate,mergersandacquisitions(M&A)havegrownat
a rapid pace, which calls for an in-depth research as to what drives firms towards
these phenomena and how it affects them financially.
The present monograph presents a research work relating to the impact of
mergers and acquisitions on the returns in short and long terms. For the purpose,
well-established research techniques, namely, event study methodology and two
experimental designs, viz., ‘before-and-after design’ and ‘after-only design’ have
been used. Besides these techniques, two surveys have also been conducted for
top-level Indian corporate managers of the organizations that adopted the strategy
of M&A. The surveys aim to gauge the managerial views about the corporate
governancepracticesandthemotivesofmergersandacquisitionsrespectively.The
findings of the survey are corroborated with the secondary data analysis.
The notable finding of the research is that market starts reacting prior to the
announcement.Themomenttheinformationismadepublic;investorsstartreacting
and the stock price jumps high, providing positive abnormal returns to the inves-
tors. Cross-border as well as domestic acquisitions have created value for share-
holders of the acquirer company on the announcement. The results indicate that
value creation is higher for cross-border acquisitions vis-a-vis domestic acquisi-
tions. The acquisitions financed with cash experience higher returns than the
acquisitions financed with stock. The acquirers of unlisted target firms experience
higher returns than the acquirers of listed target firms. The acquirers earn when
target remains as a wholly owned subsidiary. In contrast, the shareholders of
acquirer lose when the target firm is absorbed with the operations of the acquiring
firm. The acquisitions of targets from non-US developed market outperform the
return from the acquisition of US targets.
vii
viii Preface
Survey findings reveal that the primary motive of mergers in India during
2003–2015 has been to take advantage of synergies. Operating economies,
increasedmarketshareandfinancialeconomies(lowerriskleadingtolowercostof
capital) have been indicated in order of importance as the desired synergies to be
gained through corporate mergers and acquisitions in India.
M&As appear to have been financially beneficial for the acquiring companies.
Practice of corporate governance has progressed in a big way in Indian companies
as revealed by their mean score; mean corporate governance score has also
improvedovertime.Thereareseveralcompanieswhichproactivelytookinitiatives
and introduced good governance norms and standards even before these became
mandatory. Companies in service sector have better corporate governance score
thanothers.Thereisapositiveassociationbetweencorporategovernancescoreand
shareholders’ wealth due to announcements of mergers and acquisitions.
Companies with better corporate governance create higher shareholders wealth in
short term. Companies having higher corporate governance score show better
financialperformanceonthebasisofallmeasuresofrateofreturn.Companieswith
higher corporate governance score show better valuations.
Based on the findings of the research study, the following recommendations
have been made for the investors: (i) Earlier he sells, more he gains in case he
wants to earn abnormal short-term returns. (ii) An investor can also earn sub-
stantialreturnsifthesharesoftheacquiringcompanyarepurchasedtwodaysprior
to the announcement day and sold two days after the announcement day. (iii) The
announcement of cross-border acquisitions provides much higher returns than that
for domestic acquisitions. In addition, the cumulative abnormal returns in the case
ofcross-borderacquisitionsarerelatively morelastingwhiletheyaretemporaryin
the case of domestic acquisitions. (iv) The announcement of completeacquisitions
oftargetfirmasawhollyownedsubsidiaryprovidesmuchhigherreturnsthanthat
for partial/ majority control acquisitions. Besides, the cumulative abnormal returns
in the case of complete acquisitions are relatively more lasting while they are
temporary in the case of partial/majority control acquisitions. (v) The announce-
ment of acquisitions financed with cash payment provides substantial returns.
(vi) As far as agency costs are concerned, investments in companies with better
corporate governance score are more profitable.
Based on the findings of the research study, the following recommendations
have been made for the corporate managers and policy makers: (i) The study
suggests that the Indian managers adopt mergers and acquisitions as effective
strategy for corporate growth. It brings attention of the managers to consider
cross-border as well as domestic acquisitions as an option to strengthen their
competitivenessastheeffectsoftheseannouncementsappeartobeagoodindicator
oflongertermsuccess.(ii)Managersshouldthinkofcashasamodeofpaymentto
finance mergers. (iii) The management may acquire the target firm as a subsidiary
andmayabsorbitwithitsownoperationslateron.(iv)Themanagementshouldbe
aware of the need for efficient corporate governance structure and mechanism to
Preface ix
control information asymmetry. (v) The findings that firm performance is signifi-
cantlyinfluencedbyeffectivecorporategovernancecouldservetojustifyregulatory
measurestowardsenforcinghealthycorporategovernanceregimeandinitiativesto
encourage companies to adopt and adhere to these measures.
Shillong, India Neelam Rani
New Delhi, India Surendra Singh Yadav
New Delhi, India Pramod Kumar Jain