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CHAPTER ONE 1.0 1.

1 Background of the Study INTRODUCTION

We have been learning about the companies coming together to from another company and companies taking over the existing companies to expand their business. The changing environments and the new forms of competition have created new opportunities and threats for business firms. The change imperatives are strong, and firms must adjust to new forces of competition from all directions. This has forced many of them to adopt many forms of restructuring activity. Twenty years back, few companies made mergers a key element of their growth strategy. Mergers were an afterthought or episodic. Today, many companies look to achieve over 50 percent of their growth from M&As. Thomas and Weston(1992). There is no question that the pent-up demand for mergers has been brought back to life due to various factors such as convergence of low interest rates, debt availability, private equity and venture capital, cash infusions from initial public offers and the perceived lack of organic growth opportunities due to a saturated marketplace. For large samples, some M&As succeed, others fail. But well conceived and effectively implemented M&A activity can yield returns to shareholders in excess of broad stock market indexes .The Economist (2000). Some acquirers have developed processes that facilitate the achievement of highly impressive track records. The returns to acquiring firms are influenced by a number of factors. Many firms engage in a series of M&A activities over time thus making it difficult to isolate the influence of a single acquisition event. If the time period over which the returns to the shareholders of acquiring firms includes a year or two before a specific acquisition, on average acquiring firms earn at least the same as their cost of capital. But studies also reveal that for the largest combinations during the period of strategic mergers (1992-98), in at least two-thirds of the cases, value is increased.

In these long-term effects, the expected synergistic characteristics of mergers can contribute to improved performance through successful efficiency of operations, whereby economies of scale spread the large fixed costs of investing in machinery or computer systems over a larger number of units. Another efficiency gain is achieved by combining complementary activities. An example is combining a company strong in research with one strong in marbling. .Cosh,Hughes,Lee and Singh(1989).

This effect of merging companies is a well-known classic issue, where increased size of companies and synergies, through internal growth or by means of mergers, are positively related to long-term performance. Schumpeter (1942).

The probability of deals success goes up considerably when the key elements of post-merger integration are not only started before closing, but when the likely risks and challenges of the integration are considered al the very beginning of the merger process, when the acquirer is deciding what to buy and what to pay. All of the elements that affect Post merger integration success, especially the culture of the companies, must be assessed and rolled into the synergy (and price to pay) calculation.

Pre-merger planning has become especially critical as companies face pressure to deliver synergies as soon as possible. In essence, there should not be separate mergers and post-merger integration process, but a holistic approach to the deal, from strategy to target identification and valuation to integration. This involves looking downstream al core processes and the nuts and bolts of how things work and in getting the people who know how to design and implement changes to these systems and processes involved up front, especially during the valuation stage. Berger (1999). Mergers have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of business as a number of economies are being deregulated and integrated with other economies. Most mergers actually benefit consumers by allowing firms to operate more efficiently. But some are likely to lessen competition. That, in turn, can lead to higher prices, reduced availability of goods or services, lower quality of

products, and less innovation. Indeed, some mergers create a concentrated market while others enable a single firm to raise resources. Berger (1999).

Internal growth and mergers are not mutually exclusive activities. Indeed, they are mutually supportive and reinforcing. Successful firms use many forms of M&A and restructuring based on opportunities and limitations. The characteristics and competitive structure of an industry will influence the strategy employed. The factors favoring M&A in part relate to industry characteristics. Some other advantages of M&A or external growth may also be noted. Thomas and Weston(1992).

An acquisition enables the acquirer to obtain an organization already in place with an historical track record. Some surprises are still possible, but they can be mitigated to some degree by appropriate due diligence. An acquisition generally involves paying a premium, but the cost of acquiring a company may be determined in advance. An acquisition may also represent obtaining a segment divested from another firm. The logic is that the segment can be managed better when added to the activities of the buying firm. Firms generally have internal development programs that are assisted by M&A activity.

Acquisitions and mergers have been popular methods of increasing the size and value of firms in modern times. This approach, in contrast to the older system of increasing value through organic growth, is faster and in many cases cheaper. It is important to observe that one of the greatest challenges of corporate raiding has always been identifying the business area in which a firm should participate in order to maximize its long-term profitability . It would be appropriate to adopt a definition of corporate strategy that helps in understanding issues in mergers and acquisitions.

Mintzberg and Quinn (1991), define strategy as a pattern or a plan that integrates an organizations major goals, policies and actions. Strategic decisions are based on building on or stretching an organizations resources and competencies to create new opportunities or capabilities based on these resources. Strategy

therefore, may in some cases require major resources which are beyond firms existing capability. In such a situation, a merger or an acquisition may be the only available option. It may, therefore, for instance, be an appropriate phenomenon for an organization to merge with or acquire a supplier of its raw material so as to guarantee availability and quality of such raw material or with a competitor so as to expand its market share or with another firm in order to comply with changes in legislation. Many managers will today regard buying a company for access to markets, products, technology, resources or management talent as less risky and speedier than gaining the same objectives through internal efforts or organic growth. Jemison and Sitkin(1986).

1.2 Problem Statement This study will be set to find out the effects of mergers and acquisitions, efficiency on the performance of the firms will increase or not. The question for the study will therefore be: Would the performance of the firms will be the same before and after merging and acquisition?

1.3 Research Question

The research questions had been decided as follows: i. What is the significance of merger and acquisition in eliminating competition and taking monopoly benefits? ii. What is the importance of mergers and acquisitions in the increase in market share? iii. What is the role that mergers and acquisitions play in achieving enhanced profitability? iv. To have what extents have mergers and acquisitions assist in the attainment of returns on investment? v. What are the benefits of synergy that is achieved once companies adopt merger and acquisitions?

1.4

Objectives of the Study

1.4.1 General objective To establish the effects of mergers and acquisitions on financial performance of retail stores.

1.4.2 Specific objectives The specific objectives have been decided as follows: i. ii. iii. What is the importance of mergers and acquisitions in the increase in market share? What is the role that mergers and acquisitions play in achieving enhanced profitability? To have what extents have mergers and acquisitions assist in the attainment of returns on investment? iv. What are the benefits of synergy that is achieved once companies adopt merger and acquisitions? 1.5 Significance of the Study

This study will be of value to: Current investors and firms at the Karachi Stock Exchange (KSE) and elsewhere and any other firm in competitive industry as it will add knowledge on the understanding of the importance of mergers and acquisitions in analyzing company performance. Academicians and researchers by providing more insight into the relationship between mergers and acquisitions and company performance. As the environment is very dynamic, the practitioners of management need to update themselves and their respective industries on the best practices required. To the executives and managers of the companies listed at the KSE, the study will cover all the companies which have merged and the relative performance.

This study will also contribute to the bulk of knowledge and research at the university as it will be used as a basis of reference by students for any future study in the field of mergers, acquisition and restructuring of companies. 1.6 Scope of the Study

The scope of this study covered the companies in Site area Karachi that have undergone mergers and acquisitions between the year 2010 and 2012. 1.7 Limitations of the Study

The major constraints of this study were: i. Time factor: Due to the fact that the time allocated for this study was short, the researcher was compelled to take a case of only those companies that operate in Karachi . This however, yielded reliable and valid results. ii. Financial constraints: This restricted the scope of this study because of lack of sufficient funds. The researcher however, engaged the use of his personal savings and went for cost effective data collection tools and methods to cut on costs. iii. Lack of cooperation: The researcher encountered a lot of resistance while carrying out this study due to the fact that the topic under study touched on the sensitive issue of mergers and acquisitions. The researcher overcame this limitation by accompanying each questionnaire with a cover letter informing the respondents that the research study was purely for academic purposes and that the responses given would be treated with utmost confidentiality between the researcher and the respondent.