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Volume-7, Issue-3, May-June 2017
International Journal of Engineering and Management Research
Page Number: 281-293
Corporate Restructuring: A Performance Appraisal of Manufacturing
Sector
Bharat Bhatt
Assistant Professor, Zakir Husain Delhi College, University of Delhi, INDIA
ABSTRACT
The present study will discuss the impact of M&A on company’s performance during 2001-2013 using two approaches, stock analysis and accounting analysis. The study purposes to test the impact of mergers and acquisitions on company’s performance in manufacturing sector. The study is conducted using two methods, including event study method to measure stock performance and financial ratios analysis to measure accounting performance. Event study method analyzes the cumulative abnormal return around announcement date and completion date. Financial ratio analysis compares performance of the bidder companies before and after the merger and acquisition and explores the source of performance changes.
The result of event study analysis shows significant both positive and negative performance changes of companies following mergers and acquisitions. Meanwhile, the financial ratio analysis shows significant negative changes of performance of companies following mergers and acquisitions.
Keywords— Financial, company, management, manufacturing sector
I.
INTRODUCTION
(M&A) and corporate restructuring are a big part of the corporate finance world. The phenomenon of rising M&A activity is observed world over across various continents, although, it has commenced much earlier in developed countries (as early as 1895 in US and 1920s in Europe), and is relatively recent in developing countries.
Every day, investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. Not surprisingly, these actions often make the news. Deals can be worth hundreds of millions, or even billions, of dollars. They can dictate the fortunes of the companies involved for years to come. For a CEO, leading an M&A can represent the highlight of a whole career.
Mergers and acquisitions are among the most effective ways to expedite the implementation of a plan
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stock prices in the event window of ±2 days. Across all the event windows, target firm’s stock price yields positive CAAR that is significantly different from zero. The target firms depict that the post announcement returns are significantly greater than the pre-announcement returns, indicative of the immediate market reaction to the information disclosure. Sinha, Kaushik & Chaudhary (2010) in their research paper “Measuring Post Merger and Acquisition Performance: An Investigation of Select Financial Sector Organizations in India “- examined the impact of mergers and acquisitions on the financial efficiency of the selected financial institutions in India. The analysis consisted of two stages. Firstly, by using the ratio analysis approach, calculated the change in the position of the companies during the period 2000-2008. Secondly, examined changes in the efficiency of the companies during the pre and post-merger periods by using nonparametric Wilcoxon signed rank test. Results showed a significant change in the earnings of the shareholders, there is no significant change in liquidity position of the firms. The result of the study indicate that M&A cases in India show a significant correlation between financial performance and the M&A deal, in the long run, and the acquiring firms were able to generate value. Campa &Hernando (2005), in their research paper “M&A performance in the European Financial industry”, reported evidence on shareholders returns from mergers. Mergers announcements brought positive excess returns to the shareholders of the target company around the date of the announcement. Returns to shareholders of the acquiring firms were essentially zero around announcement. One year after the announcement, excess returns were not significantly different from zero for both the firms i.e. acquirer and the target firm.
Dhiman, & Parray, in their research paper titled “Impact of Acquisition on Corporate Performance in Indian Manufacturing sector” found out the result and analysis of the key financial ratios of the acquiring firms shows that there is no significant effect on the profitability of the firms following acquisitions. The main finding of the study is that there is strong evidence that the profitability of a firm that performed an acquisition has no statistical difference between pre acquisition period and post acquisition period.
Dilshad(2012)- A merger or acquisition is assumed to create value if the returns on the shares of the acquirers and targets increase on the announcement of the merger. This research had one primary objective that is to examine the effects of a merger announcement of banks on stock values. Evidence here supports that significant cumulative abnormal returns were short lived for the acquirers. At the end of the event window, the cumulative abnormal returns were 0. Evidence of excess returns after the merger announcement was also observed along with the leakage of information that resulted in the rise of stock prices few days before the announcement of merger or acquisition. At the same time, the results of cumulative abnormal returns showed that target banks earned abnormal returns on the merger
announcement day. Pilloff (1996) used both the accounting and market data to study the gains achieved in a sample of forty-eight mergers involving publicly traded institutions that merged between 1982 and 1991. To assess the overall gain in wealth, the consolidated sum of acquirer and target abnormal return was measured. The results suggest that merger announcement typically do not lead to overall gain in stockholder wealth. The abnormal return findings suggest that on average market does not expect mergers to lead to gains in performance, a result consistent with actual measured performance gains.
Liargovas (2010) in his reseach paper titled “The Impact of Mergers and Acquisitions on the Performance of the Greek Banking Sector: An Event Study Approach examined the impact of mergers and acquisitions on the performance of Greek banking sector over the period 1996-2008, by using two approaches; event study methodology and operating performance. The results from event study methodology, using a 30-day event window indicate that stock prices show significant positive cumulative average abnormal returns (CAARs) before the announcement for a period of ten days (for targets and bidders banks). The overall results (the weighted average of gains to the bidder and target bank), indicate that bank mergers and acquisitions have no impact and do not create wealth. The empirical results also indicate significant implications for rejection of the “semi-strong form” of Efficient Market Hypothesis (EMH) of the Athens Stock Exchange, possibly reflecting leakage of information. By measuring twenty financial ratios, it was found that the Greek banking industry is moderate and not highly concentrated (many banks with low market shares). Operating performance does not improve following mergers and acquisitions while there are controversial results when comparing merged banks with the group of non-merging banks.
David A. Becher (2000) examined the valuation effects of sample of 558 bank mergers from 1980- 1997. The overall results indicated that bank mergers create wealth. A basic event study was done to calculate abnormal returns for target and bidder firms and the author focuses on two different widow periods, 36 day window and an 11 day window. The returns to the bidder firms were statistically negative in the 11- day window, while the returns to the target firms and combined firms remain statistically positive in both windows. Their results are also consistent with the notion that bank mergers occur for synergistic reasons and are not the result of empire building. Kithinji & Waweru, (2007) found out from his studies that results are mixed for stock market approach and accounting based approach. The analysis of pre and post-merger profitability and efficiency ratios for the acquiring firms shows that there is a differential impact of mergers for different ratios and different sectors.
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situation, the factors affecting M&A needed to be determined and how it can affect need to be explored so as to act accordingly.
II.
RESEARCH METHODOLOGY
OBJECTIVES OF STUDY
The broad objective of this study is to measure the performance of manufacturing sector companies after corporate restructuring using two basic approaches namely: MARKET MODEL METHOD AND FINANCIAL RATIOS APPROACH in Indian corporate Sector .A sample of 8 companies have been undertaken which have undergone corporate restructuring during the period of 2000-2014. Many scholars examined the impact of M&A on corporate performance using two different approaches. Some research analyzed performance of companies around M&A through providing evidence on stock market reactions for the companies involved in M&A. Other researchers measured the M&A effect on companies performance based on accounting data.
1) The present study purposes to test the impact of mergers and acquisitions on Bidder Company’s performance first by using market model method. Event study method analyzes the cumulative abnormal return around announcement date and dividing the time as pre-merger and post-merger. The amount of announced M&A in most industry decreased during 2007 to 2009, and increase during 2009 to 2010. Financial crisis is suspected as one of the cause of fluctuating movement of amount of announced M&A during 2007 to 2010.
Previous literature about M&A generally shows increasing in return to target firm and some show insignificant impact for bidder firms. The positive impact of M&A comes from many sources, such as revenue enhancement and cost reduction (Cornett, et al., 2006). The negative impact is caused by some reasons, like agency problems and the cost of integration (Bertrand & Betschinger, 2012.
Performance changes are measured by stock prices data of companies between pre- and post- M & As.
2) To examine and evaluate the impact of mergers and acquisitions on the liquidity and leverage position of the
selected units by some important parameters of liquidity and leverage& management efficiency ratios such as:-
Current Ratio
Debt to Equity Ratio
return on assets
Earnings per share(EPS)
BVS(book value per share)
Net profit margin
Interest coverage ratio
Return on capital employed
III.
SCOPE OF STUDY
The scope of the study is limited to the merger and acquisitions of the 8 Indian companies in the corporate sector involved in corporate restructuring with domestic as well as cross border companies.
The period of coverage to study the performance of mergers and acquisitions in the Indian corporate sector is from 2000 to 2014.
IV.
DATA
Data for event study analysis has been gathered from various sites like NSE etc.
This empirical study analyses the financial data of selected merging firms in the period 2000-2013. In order to evaluate the financial performance of the merging firms in the long run, at least three years financial data is required, for one year before the merger and one year after the merger.
Data for financial ratios analysis has been collected from CMIE Prowess database, annual financial statements of companies and various other internet sites to determine the financial performance of the firm in ultimate long run using standard ratios.
Data Sample
Companies under study has been selected on a random basis.
Table 1 gives the overview of key information of the selected mergers in the sample has been given. The sample covers companies in Indian corporate sector who underwent corporate restructuring in the period 2000-2013 countries. From the data set, it can be seen that mergers vary in sizes from small ones like Lakshmi & TVS merger and big ones like Satyam and tech Mahindra
TABLE 1:COMPANIES SELECTED UNDER STUDY
Acquiring firm Target firm 1 Dhampur sugar limited JK sugar mills
2 Satyam computers Tech Mahindra
3 Reliance industries limited Indian petrochemicals limited 4 VIP industries limited Aristocrat luggage limited 5 Tata chemicals General chemicals limited 6 TVS limited Lakshmi auto parts limited
7 Hindalco Indo gulf cooperation limited
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V.
TOOLS OF ANALYSIS
Two methods are used to study the success of mergers and acquisitions- event study analysis via market model method and financial ratios using accounting data.
VI.
DATA ANALYSIS AND
INTERPRETATION
Analysis of event studies based approach
DHAMPUR SUGAR MILLS & JK SUGAR LIMITED Where the regression equation is
Y= 0.0007+ 0.695078 X
Where .0007 represents the intercept of the regression equation (if a return on reference stock index
is 0 then firm’s return will be .0007 which is a negligible case.
And .695 represents the slope (change in the reference stock will cause change in firm’s stock) for every additional increase in the returns of reference stock index there will be 0.695 times increase in the firm’s stock.
MULTIPLE R-29% of positive correlation exists between the two variables. This is a very weak relationship
R SQUARE- 8% percentage of variance in the dependent variable (firms return) that can be explained by the independent variable (returns on reference index CNX NIFTY).whereas 92% of variance in dependent factor is attributable to other factors.
Abnormal returns over the estimation window of 120 days. Just before the merger announcement AR has fallen steeply. Around the merger news it is on a little bit rise but after the news it has fallen steeply with little magnitude of rise.
VII.
MAHINDRA SATYAM & TECH
MAHINDRA
Y=0.002065276+ 0.282984806X
Where .0020 represents the intercept of the regression equation (if returns on reference stock index is 0 then firm’s return will be .0020 which is
negligible.And.2829 represents the slope (change in the reference stock will cause change in firm’s stock) for every additional increase in the returns of reference stock index there will be 0.282 times increase in the firm’s stock.
MULTIPLE R-15% of positive correlation exists between the two variables which is a very weak relationship.
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Abnormal returns over the estimation window of 120 days.
VIII. RELIANCE INDUSTRIES
LIMITED& IPCL
Y= .0001446+1.044X
Where .000144 represents the intercept of the regression equation (if returns on reference stock index is 0 then firm’s return will be .000014 which is negligible.
And 1.04 represents the slope (change in the reference stock will cause change in firm’s stock) for
every additional increase in the returns of reference stock index there will be 1.044 times increase in the firm’s stock.
MULTIPLE R- 83% of positive correlation exists between the two variables which shows high degree of correlation between the two variable.
R SQUARE- 69% percentage of variance in the dependent variable (firms return) that can be explained by the independent variable (returns on reference index CNX NIFTY). the remaining 31% of variation in dependent variable is explained by other factors.
Abnormal returns over the estimation window of 120 days. Around the merger announcement AR is on rise. But before merger it rising and falling inconsistently. After the merger it is on a rise majorly.
IX.
VIP INDUSTRIES& ARISTOCRAT
LUGGAGE LIMITED
Y= -0.000677396+0.403087384X
Where -0.00067 represents the intercept of the regression equation(if returns on reference stock index is 0 then firm’s return will be -0.00067 which is a negligible case.
And 0.403 represents the slope (change in the reference stock will cause change in firm’s stock) for every additional increase in the returns of reference stock index there will be .403 times increase in the firm’s stock. MULTIPLE R- 24% of positive correlation exists between the two variables which is a very weak relationship.
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Abnormal returns over the estimation window of 120 days. Normal behavior of AR is showing very steep rise before the merger announcement. Then rising and falling at a normal rate after announcement news. Around the end of merger period it is falling steeply.
X.
HINDALCO AND INDO GULF
CORPORATION LIMITED
Y=-0.00011741 +0.440002314 X
Where -.000117 represents the intercept of the regression equation (if returns on reference stock index
is 0 then firm’s return will be -.000117 which is a negligible case.
And .4400 represents the slope (change in the reference stock will cause change in firm’s stock) for every additional increase in the returns of reference stock index there will be .4400 times increase in the firm’s stock.
MULTIPLE R-29% of positive correlation exists between the two variables which is low degree of correlation.
R SQAURE- 8% percentage of variance in the dependent variable (firms return) that can be explained by the independent variable (returns on reference index CNX NIFTY). Whereas 92% variation in dependent variable is caused by other factors.
Abnormal returns over the estimation window of 120 days. Major behavior of AR is showing deep falls in the estimation window. After the merger announcement has fallen steeply. Fall of AR is magnificent than the rise of AR.
XI.
JK TYRES & TORNEL
Y=-0.00075+0.812465 X
Where -.00075 represents the intercept of the regression equation(if returns on reference stock index is 0 then firm’s return will be -.000117 or case of negative returns.
And .812 represents the slope (change in the reference stock will cause change in firm’s stock) for every additional increase in the returns of reference stock index there will be .812 times increase in the firm’s stock.
MULTIPLE R- 53% of positive correlation exists between the two variables which is a moderate degree of correlation between two variables.
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Abnormal returns over the estimation window of 120 days. Pattern of AR is showing steep rises and steep falls around the estimation period showing inconsistency.
The returns are negative both on pre and the post announcement date due to the financial crisis of USA affecting Indian stock markets in 2008.
XII.
TATA CHEMICALS LIMITED&
GENERAL CHEMICAL LIMITED
Y=0.000108624+0.879548278X
Where .0001 represents the intercept of the regression equation(if returns on reference stock index is
0 then firm’s return will be .00001 which is a negligible case.
And .879 represents the slope (change in the reference stock will cause change in firm’s stock) for every additional increase in the returns of reference stock index there will be .879 times increase in the firm’s stock.
60% of positive correlation exists between the two variables(firms return and returns on reference index CNX NIFTY) which is a moderate degree of correlation.
36% percentage of variance in the dependent variable (firms return) that can be explained by the independent variable (returns on reference index CNX NIFTY).whereas remaining 64% variation in dependent variable is caused by other factors.
Abnormal returns over the estimation window of 120 days. 60 days before and 60 days after the merger. Before the merger, AR is falling and rising inconsistently but around the merger date, AR is plummeting steeply.
TVS MOTOR COMPANY& LAKSHMI AUTO COMPONENTS
Y=-0.0038083 +0.60318362X
Where -.003 represents the intercept of the regression equation (if returns on reference stock index is 0 then firm’s return will be -.0013 or negative returns.
And .603 represents the slope (change in the reference stock will cause change in firm’s stock) for every additional increase in the returns of reference stock index there will be .603 times increase in the firm’s stock. 9% of positive correlation exists between the two variables.which is a very low degree of relationship between two variables.
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Abnormal returns over the estimation window of 120 days. AR of TVS is insignificant and around 0
almost in the whole estimation period expect in last few days where it had a drastic fall.
XIII. MEASURING CORPORATE PERFORMANCE OF MERGER USING FINANCIAL
RATIOS
Dhampur sugar & JK sugar limited- CLASS OF
RATIOS 2011 2012 2013 performance
LIQUIDITY current ratio 0.82 0.65 0.56 poor FINANCING debt equity ratio 1.81 1.87 2.9 poor PERFORMANCE return on capital employed 7.89 10.17 8.51 good
PERFORMANCE EPS 1.53 5.24 3.1 good
PERFORMANCE BVS 92.77 88.39 84.93 poor
PERFORMANCE return on assets 92.77 88.39 84.93 good PERFORMANCE net profit margin(%) 0.37 1.85 1.53 good LIQUIDITY interest coverage ratio 0.88 1.46 1.35 good
According to this approach, Dhampur sugar has performed good on the performance parameters like book value per share, return on assets, return on capital
employed, EPS and on interest coverage ratio. 5 parameters out of 8 has improved for Dhampur after merger with JK sugar.
Satyam and tech Mahindra CLASS OF
RATIOS 2012 2013 2014 performance LIQUIDITY current ratio 0.98 0.95 2.1 good FINANCING debt equity ratio 0.33 0.26 0.03 good
PERFORMANCE return on capital employed 16.05 17.51 32.61 good PERFORMANCE EPS 36.13 50.93 115.02 good
PERFORMANCE BVS 70.08 326.45 367.86 good PERFORMANCE return on assets 270.08 326.45 367.86 good
PERFORMANCE net profit margin(%) 8.78 10.87 16.48 good LIQUIDITY interest coverage ratio 9.46 8.5 36.92 good
According to this approach, satyam and tech Mahindra has outperformed
on all the 8 ratios used to access the performance of a company after merger. All the ratios have improved after the merger of the two technical giants.
Reliance industries & IPCL CLASS OF
RATIOS 2006 2007 2008 performance LIQUIDITY current ratio 0.83 0.77 0.98 poor FINANCING debt equity ratio 0.48 0.45 0.46 poor
PERFORMANCE return on capital employed 17.37 18 15.68 poor PERFORMANCE EPS 65.08 85.71 133.86 good
PERFORMANCE BVS 324.03 439.57 542.74 good PERFORMANCE return on assets 10.55 10.53 12.7 good
PERFORMANCE Net profit margin(%) 11.4 10.69 14.54 good LIQUIDITY interest coverage ratio 13.28 13.51 17.05 good
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VIP industries & aristocrat luggage- CLASS OF
RATIOS 2006 2007 2008 performance LIQUIDITY current ratio 0.65 1 0.97 poor
FINANCING debt equity ratio 1.42 1.01 0.95 good PERFORMANCE return on capital employed 12 17.8 18.43 good
PERFORMANCE EPS 5.22 5.63 7.11 good
PERFORMANCE BVS 43.12 44.24 46.98 good
PERFORMANCE return on assets 37.67 39.01 42.39 good PERFORMANCE Net profit margin(%) 2.58 3.22 3.6 good
LIQUIDITY interest coverage ratio 3.01 3.13 3.43 good
Vip industries has performed good on all the indicators after merger except one. So it seems that it has reaped the merger benefits according to this appraoch
Hindalco& gulf corporation- CLASS OF
RATIOS 2006 2007 2008 performance LIQUIDITY current ratio 3.59 1.76 1.2 poor
FINANCING debt equity ratio 0.16 0.21 0.39 poor PERFORMANCE return on capital employed 20.43 15.2 13.08 poor
PERFORMANCE EPS 91 92.12 62.95 poor
PERFORMANCE BVS 587 615 669.44 good
PERFORMANCE return on assets 587.98 615.25 669.44 good PERFORMANCE net profit margin(%) 28.38 27.66 11.29 poor
LIQUIDITY interest coverage ratio 13.11 18.47 9.36 poor
Hindalco has performed poor on 7 indicators out of 8. Only BVS of the company has improved after the merger with gulf cooperation.
Tata chemicals and general chemicals limited CLASS OF
RATIOS 2008 2009 performance LIQUIDITY current ratio 0.62 0.62 poor
FINANCING debt equity ratio 0.66 1.01 poor PERFORMANCE return on capital employed 11.3 13.36 poor
PERFORMANCE EPS 40.56 19.22 poor
PERFORMANCE BVS 152 154.01 good
PERFORMANCE return on assets 152.61 154.01 good PERFORMANCE net profit margin(%) 22.77 5.32 poor
LIQUIDITY interest coverage ratio 31 6.71 poor
Tata chemicals has performed poor on 6 parameters out of 8 after merger. Its performance has improved on ROCE which is a important indicator. May
be Tata would reap merger benefits from general chemicals limited after 1 or two year.
Tvs motors & Lakshmi auto parts limited- CLASS OF
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FINANCING debt equity ratio 0.29 0.21 good
PERFORMANCE return on capital employed 38.01 32.29 good
PERFORMANCE EPS 56 5.94 poor
PERFORMANCE BVS 183.09 24 poor
PERFORMANCE return on assets 183.09 24.33 poor
PERFORMANCE net profit margin(%) 4.74 4.8 good LIQUIDITY interest coverage ratio 18.43 21.76 good
TVS has performed good on 4 important indictors like net profit margin, debt equity ratio, ROCE,
interest coverage liquidity. But poorly on ROA which is an important indicator of managerial efficiency
Jktyres and tornel CLASS OF
RATIOS 2007 2008 2009
LIQUIDITY current ratio 0.67 0.65 0.6 poor FINANCING debt equity ratio 1.71 1.82 1.91 poor
PERFORMANCE return on capital employed 13.26 14.02 14.94 good
PERFORMANCE EPS 21.67 10.56 4.64 poor
PERFORMANCE BVS 19.22 2.97 2.97 poor
PERFORMANCE return on assets 170.71 150.42 138.97 poor
PERFORMANCE net profit margin(%) 2.37 1.4 0.38 poor LIQUIDITY interest coverage ratio 2.11 1.7 1.55 poor
Jk tyres has performed good on just one indicator ROCE. Records show that jk tyres reaped the merger benefits from tornel after 2011 because of the US financial crisis that occurred in 2007 in USA. Tornel is a
Mexican firm who was also affected by the global slowdown. So the performance of this cross merger improved after the ending regime of crisis.
XIV. SUMMARY AND CONCLUSIONS
METHOD 1- EVENT ANAYSIS USING MARKET MODEL METHOD
DAILY CAR (CUMULATIVE ABNORMAL RETURNS) of companies in corporate sector.
The above diagrammatic representation shows that the abnormal returns picked a rise before the merger news. Around the merger news, the returns start falling
as shareholders started selling their share because of earlier over valuation.
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97
101 105 109 113 117 121
C
A
R
number of days
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But few days after the merger again the returns have gain momentum before a slant fall at the end of the estimation period.
In this study, few significant mergers took place in the year 2002, 2007, 2008.
These years are considered to be the years of financial turmoil because of trashing of World Trade Centre of USA in 2002 and the arrival of USA subprime crisis in mid October 2008 when the Indian stock market crashed significantly because of financial contagion as a result of globalization. Any event in global stock market
directly affect Indian stock market which increases its volatility too much.
According to this approach companies like reliance and IPCL merger, VIP and aristocrat merger, TVS and Lakshmi auto parts limited, they proved to be the winners as their merger synergy effects are visible on the stock markets.
Various companies like JK tyres and Tornel, Tata chemicals and general chemicals limited merger reaped the merger benefits after some time due to several factors affecting the Indian stock market at the time of their merger.
XV.
RESULT OF HYPOTHESIS TESTING OF CAR (CUMULATIVE ABNORMAL
RETURNS) USING Z- TEST
z-Test: Two Sample for Means
Variable 1 Variable 2
Mean 0.035762165 -0.203202211
Known Variance 0.02 0.31
Observations 60 60
Hypothesized Mean Difference 0
Z 3.222194994
P(Z<=z) one-tail 0.000636063
z Critical one-tail 1.644853627
P(Z<=z) two-tail 0.001272125
z Critical two-tail 1.959963985
Hypothesis testing suggests that the alternate hypothesis is true that there is increase or decrease in the shareholder’s wealth after the merger. Even from the diagrammatic representation of CAR over the estimation period shows that the AR around the merger news started falling for few days. They gain a momentum after the merger with positive CAR for few days before taking a sharp fall around the end of the estimation period. May be due to leakages in the information of merger news
spreads into the whole market leading to the rising returns of stocks.
But around the merger news period, shareholders start selling their stocks due to its overvaluation caused by leakages in the merger news. And this ultimately causes the price to fall around the merger period.
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XVI. METHOD 2-FINANCIAL PERFORMANCE USING ACCOUNTING RATIOS
CLASS OF RATIOS NAME
Number of poor performance companies(post-merger year)
Number of good performance companies(post-merger year)
LIQUIDITY current ratio 1 7
FINANCING debt equity ratio 4 4
PERFORMANCE return on capital employed 5 3
PERFORMANCE EPS 4 4
PERFORMANCE BVS 5 3
PERFORMANCE return on assets 5 3
PERFORMANCE Net profit margin (%) 5 3
LIQUIDITY interest coverage ratio 5 3
According to this approach, most of the companies have performed well on the performance indicators Like Book value per share, return on assets, return on capital employed, net profit margin which shows their Managerial efficiency. All the companies except 1 failed to maintain the ideal current ratio. The current ratios of most of the companies are really poor after the merger. There is no significant improvement in the company’s ability to maintain liquidity. Whereas 50% of the total companies have shown good performance in their BVS and debt equity ratio
If we talk individually, then tech Mahindra and Satyam merger outperformed according to this financial ratios approach. All the ratios of this company have shown good performance after the merger. Majority companies took time to reap the merger benefits due to several reasons. They took more than a year to absorb the merger synergy benefits to reflect the glow in their performance.
XVII. SUMMARY
A merger or acquisition is assumed to create value if the returns on the shares of the acquirers firm increase on the announcement of the merger and improve the performance in terms of accounting ratios.
Eight acquiring companies and 8 target companies were used in the sample for the study of price reactions of stocks. Returns on stocks of companies were compared to the market returns i.e. CNX Nifty index. The findings reveal that there is definitely action in the returns of stock around Day 0, but the analysis also shows that the merger may not be significant in determination of the reason for the particular behavior on the movements of stocks.
There are so many other abnormal events like global financial depressions, announcement of the budget of the central government etc. that have captured their effect on the returns of stocks around the announcement news of merger in this study.
Whereas the other accounting ratio approach concludes that it takes time to absorb the synergy benefits arising from merger. Period of one year is not sufficient to measure the performance of the companies in terms of their financial ratios after one year. May be even after one year synergy benefit wont arise from the corporate restructuring deal because success of any M&A deal depends on so many factors that were not taken into account implicitly.
REFERENCES
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[5] Campa & Hernando (2005),“M&A performance in the European Financial industry”
[6] Data extraction from- CMIE (Centre for monitoring Indian economy) Prowess database.
[7] Halpern, P. (1983). Corporate Acquisitions: A theory of Special Cases. A Review od event studies applied to Acquisitions. The Journal of Finance , 297-317.
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Sector: An Event Study Approach, International Journal of Economics and Finance Vol. 3, No. 2; May 2011. [11] Petrunina(2013). THE PERFORMANCE OF MERGERS AND ACQUISITIONS IN EMERGING CAPITAL MARKETS: NEW EVIDENCE
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