The Impact of Mergers and Acquisition Transaction on the Stock

Performance in India

For

Online International Journal

Multi Disciplinary Edu Global Quest (MDEGQ)

By

Mr. Mohammad Imran Shaikh

S. R. Luthra Institute of Management

MTB College Campus, Near Adarsh Society, Athwalines, Surat.

E-mail: imran15381@yahoo.co.in

(M) 9879068469

&

Mr. Paresh Dave

S. R. Luthra Institute of Management

MTB College Campus, Near Adarsh Society, Athwalines, Surat.

E-mail: pareshdave2008@yahoo.co.in

(M) 9924640598

Discipline: Professions and Applied Sciences

Sub discipline: Business, Management and Accounting

Subject of the paper: Finance

 The Impact of Mergers and Acquisition Transaction on the Stock
Performance in India
Mr. Mohammad Imran Shaikh & Mr. Paresh Dave

S. R. Luthra Institute of Management

MTB College Campus, Near Adarsh Society, Athwalines, Surat.

Abstract:

Every economy has their strength and weakness. Three major economies in the world
namely US economy, Russian economy and Asian economy had also seen recession problems.
some economy recover with some systematic strategy but some are not. due to this the company
operating within the country and oversea companies need to face the trouble. in this dilemma
some manage their operation but some failed. some enter into mergers and acquisitions to
survive in the market. recently in India. the economy has witnessed outstanding activity in
mergers and acquisition. this is proving that even Indian economy is also facing problems , and
companies are preferring to enter into merger to survive their business.

From 2010 to December 2015 end , National Stock Exchange and Bombay stock has
witnessed 101 mergers which has impacted their stock price either positively or negatively.
merger and acquisition has been done with the intention to survive in the market. but this
intention does not cover the risk of downward of wealth of the investors who had already
invested in this kind of the company. these companies are from various sectors like Power,
Banking , infrastructure , auto mobile and auto ancillary, even some are from media sector too. If
it is infrastructure sector , power, auto sectors then it is question of survival but if it is banking
sector then merger has some other intention.

Key Words: mergers , acquisition, positive reaction , negative reaction. change in wealth
 The Impact of Mergers and Acquisition Transaction on the Stock
Performance in India

1. Introduction

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate
finance world. Every day, Wall Street investment bankers arrange M&A transactions, which
brings the separate companies together to form larger ones and this action often make news.
The rationale behind mergers and acquisitions is that two companies together are more valuable
than two separate companies. The key principle behind buying a company is to create
shareholder value over and above that of the sum of the two companies. Investors in a company
that are aiming to take over another one must determine whether the purchase will be beneficial
to them. In order to do so, they must ask themselves how much the company being acquired is
really worth. In Asia, most of the M&A activities have taken place only after the Asian financial
crisis in 1997. M&A activities have not only captured the interest and attention of a broad
segment of the community but have also attracted the scrutiny of governments in Asian
economies. The reasons are that: first, most of the Asian governments encouraged the M&A of
companies so as to raise competitiveness and to reduce cost.
The biggest question is whether all M&A transaction will have positive impact on company.
Economic power would be concentrated to a few multinational enterprises (MNCs) due to M&A
activities. Mergers and acquisitions are amongst the biggest investments a company is capable to
conduct, as it is a reasonable way to enhance company value However, as Many examples
shows, every transaction does create merit for the shareholders of the involved enterprises. It's no
secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger
will cut costs or boost revenues by more than enough to justify the price premium. It can sound
so simple: just combine computer systems, merge a few departments, use sheer size to force
down the price of supplies and the merged giant should be more profitable than its parts. In
theory, 1+1 = 3 sounds great, but in practice, things can go awry. M&A comes in all shapes and
sizes, and investors need to consider the complex issues involved in M&A. The most beneficial
form of equity structure involves a complete analysis of the costs and benefits associated with
the deals. Hence it can be easily said that the share valuation after the announcement of mergers
and acquisition has not been an easy task for the investor.
2. Problem Statement
Recently around the global, the listed companies are facing a question of survival as recessions
are challenging for the business. Either they shut down the business or they do mergers to
survive in the market. But in this the biggest fear is of the retail investors and high net worth
individual investors. Who put down big money in this company and one bad decision can
decrease the wealth of the investors. In this paper the question is whether to stay invested or exit
from stock who merge with another company.
3. Significance of the study
This study will reveal the effect of merger of stock price. As merger and acquisition has a very
deep reaction on stock price. This study can give a guidelines to those investors who has a
investment who is going to declare merger. This might give guidance what they need to do in
future if the company is going to merger. The company either will perform good or may be
stable or may be worsen. But one thing is for sure that it will give some effect on stock price.
Investors can change their strategy if they are already invested or going to invest. This is how
they can save their precious hard earn money from capital loss. This study will give them
direction for investment about those who will merge with another company.

4. Review of Literature
Ronald Stunda in his Research Paper title “The Market Impact of Mergers and Acquisitions
on acquiring firms in US” (September 2014) concluded that some has a negative effect on share
price while some has positive effect on share price. It further says that firms belongs to certain
industries have positive stock price effect compare to other firms in the industries.
Manuel Käufeler written in “Stock price dynamics around merger and acquisition events”
(July 2012) measures the dynamics of the abnormal returns generated by Swiss bidding and
target firms’ shares around M&A deal publications. This is done for short-term event windows,
up to twenty-one days around the event announcement. It accepted shareholders of a Swiss target
company receive a positive abnormal return around an M&A announcement.

Rabi & Amit “Mergers and acquisitions in India: a strategic impact analysis for the corporate
enterprises in the post liberalization period” found that the nature and pattern of M&As
strategies adopted by the Indian companies reveal mostly horizontal and vertical types. This
gives strength to the argument that Indian companies are focusing on their core areas and
expanding mostly in related areas of strength which is helpful in realization of synergistic
benefits.

Arun Kumar Gopalaswamy (India), Debashis Acharya (India), Jaideep Malik (India) has
written in “Stock price reaction to merger announcements: an empirical note on Indian
markets” investigate the difference in stock price answer of target and acquiring companies due
to merger announcements. The role of insider information before merger announcements is also
empirically tested and explained to be the cause for observed pre-announcement price run-ups.
The investigation has been carried out using traditional event study methodology.

Dimitrios, Nikolaos and Efstathios (2009) in their study titled “The Effect of Mergers and
Acquisitions on the Performance of Companies – The Greek Case of Ioniki-Laiki Bank and
Pisteos Bank” has done their research in two parts, one that investigates the merger in the short-
term, while the second part investigates the long-term effects of the merger exploring the relative
position of the Alpha bank within the industry. The result concluded that one of the bank in not
only profitable in nature but also has competitiveness among its industry.

5. Research Objectives

1. To check whether mergers have positive or negative effect on share price.

2. To check out what to do if merger announcement are declared.

3. To change the strategy investing in this kind of companies.

6. Research Methodology

In order to achieve the above stated objectives the researchers has used the following elements of
research methodology. This research study is entirely based on secondary data collected from
authenticated and repudiated sources available. To obtain sample for the study out of population,
all firms that were either an acquirer or a target of the merger announcements during the period
of 2014 - 2015 are identified. Researchers have put the criteria that both the acquirer and the
target firms should be listed either in the Bombay Stock Exchange (BSE) or National Stock
Exchange (NSE) during the period because these are the two leading stock exchanges of India.
Out of the available data the researchers have selected the 20 companies for the analysis purpose.
The selection of sample has been done on random basis. After that the data has been collected for
these 20 companies. The research design used by researchers is causal in nature because this
design has been best suited for this study. Researchers have identified two variables that are
going to be studied and then the impact will be measured. Researchers have collected the data
from the date when these 20 companies announce the mergers and acquisitions transaction. This
study is short run in nature because the researchers have analyzed the data for a period of one
year only and whatever fluctuations have been observed are represented in the findings and
conclusion.

7. Hypothesis of the study

Ho = The announcement of Mergers & Acquisitions transaction significantly affected the share
price.

H1 = The announcement of Mergers & Acquisitions transaction does not significantly affected
the share price.

8. Limitations of the study

1. The study undertaken here is purely based on secondary data, hence and deficiency in
available date may misguide from the actual result.

2. This research study is limited to India and from a particular time period only.

9. Data Analysis

Target Company Acquired Company Sector

Ashok Leyland Finance Ltd. IndusInd Bank Ltd. Finance
Bank of Madura Ltd. ICICI Bank Ltd. Finance
Birla Global Finance Ltd Aditya Birla Nuvo Ltd Finance
Nedungadi Bank Ltd. Punjab National Bank Ltd. Finance
Centurion Bank of Punjab Limited HDFC Bank Limited Finance
Kochi Refineries Ltd Bharat Petroleum Corporation Oil & Gas
Bongaigaon Refinery Indian Oil Corporation Limited Oil & Gas
Fem Care Pharma Limited Dabur India Limited FMCG
ITC Hotels Ltd. ITC Ltd. FMCG
Brite Automotive and Ltd. Bright Brothers Ltd. Auto
M. J. Pharmaceuticals Ltd. Sun Pharmaceuticals Industries Pharma
Narmada Chematur Petrochemicals Gujarat Narmada Valley Fertilizers
Punjab tractors Limited Mahindra & Mahindra Limited Auto
Lakshmi Auto Components Ltd. TVS Motor Company Ltd. Auto
TCS + CMC TCS It
Network 18 Media and Investments RIL Media
Torrent Power AEC Ltd Torrent Power Ltd Power
INDOGULF Hindalco Industries Ltd Metal
SSLT + CAIRN INDIA SSLT Metal
Millennium Beer Industries Limited United Breweries Limited. Breweries & Distilleries
10. Findings Of The Study:
1. It Was Found From The Study That after the announcement of merger in HINDALCO, the
stock price lead to fall more than 57.5% in a year
2. It Was Found From The Study That after the announcement of merger in TOREENT POWER,
the stock price lead to Increase by 20% in a year
3. It Was Found From The Study That after the announcement of merger in SSLT, the stock
price lead to fall more than 61% in a year
4. It Was Found From The Study That after the announcement of merger in TCS, the stock price
lead to fall more than 10% in a year
5. It Was Found From The Study That after the announcement of merger in RIL, the stock price
lead to Increase by 25% in a year
6. It Was Found From The Study That after the announcement of merger in M&M Financial , the
stock price lead to fall 23 % in a year
7. It Was Found From The Study That after the announcement of merger in GNVFC, the stock
price lead to fall 4% in a year
8. It Was Found From The Study That after the announcement of merger in PNB, the stock price
lead to fall more than 53% in a year
9. It Was Found From The Study That after the announcement of merger in UBL, the stock price
lead to fall more than 21% in a year
10. It Was Found From The Study That after the announcement of merger in SUNPHARMA ,
the stock price lead to fall more than 32% in a year
11. It Was Found From The Study That after the announcement of merger in TVS MOTOR, the
stock price lead to increase by 4% in a year
12. It Was Found From The Study That after the announcement of merger in BPCL, the stock
price lead increase by 41 % in a year
13. It Was Found From The Study That after the announcement of merger in ITC , the stock
price lead to fall more than 15% in a year
14. It Was Found From The Study That after the announcement of merger in DABUR INDIA ,
the stock price lead to fall more than 13% in a year
15. It Was Found From The Study That after the announcement of merger in HDFC BANK , the
stock price lead to Increase BY 11%
16. It Was Found From The Study That after the announcement of merger in BRIGHT
BROTHERS , the stock price lead to Increase BY 11%
17. It Was Found From The Study That after the announcement of merger in IOCL , the stock
price lead to Increase BY 30%
18.It Was Found From The Study That after the announcement of merger in ABNUVO , the
stock price lead to Increase BY 23%
19. It Was Found From The Study That after the announcement of merger in ICICI BANK , the
stock price lead to fall more than 23% in a year
20. It Was Found From The Study That after the announcement of merger in INDUSIND , the
stock price lead to Increase BY 22.5%

11. Conclusion :
After Analyzing 20 Companies Over Merger And Acquisition The Following Analysis Were Done

 12 companies were able to generate negative return from 4% to 6%

 8 companies were able to generate positive return from 4% to 41%
 5 companies were from finance 3 companies were able to produce positive return and 2 generate
negative return
 2 companies were from OIL and GAS and both generates positive return
 3 companies were from auto and two generated positive return and one produced negative return.
 2 were from PHRAMA and both produced negative return.
 2 companies were from Metals and both had produced negative return.
 2 companies were from FMCG where one companies produces positive and other produces negative
return
 1 company was from INFORMATION TECHNOLOGY and it produces negative return
 1 company was from MEDIA and it produces Positive return
 1 company was from POWER and it produces positive return
 1 company was from fertilizers and it produces negative return
12. References:

http://www.investopedia.com/university/mergers/#ixzz3wFvFaHVN

http://www.investopedia.com/university/mergers/mergers2.asp#ixzz3wFwLuKbB

http://www.investopedia.com/university/mergers/mergers5.asp#ixzz3wFwvGKbd

http://www.investopedia.com/university/mergers/mergers6.asp#ixzz3wFxXYq6M

http://nseindia.com/corporates/corporateHome.html?id=allAnnouncements

http://www.moneycontrol.com/india/stockpricequote/computerssoftware/
tataconsultancyservices/TCS

Maditinos, D., Theriou, N., & Demetriades, E. (n.d.). The Effect of Mergers and Acquisitions on
the Performance of Companies – The Greek Case of Ioniki-Laiki Bank and Pisteos
Bank. European Research Studies,, Xii(2).

Gopalaswamy, A., Acharya, D., & Malik, J. (n.d.). Stock price reaction to merger
announcements: An empirical note on Indian markets.Investment Management and Financial
Innovations, 5(1).

Stunda, R. (n.d.). The impact of mergers and acquisitions on acquiring firms in the
U.S. JOURNAL OF ACCOUNTING AND TAXATION., 6(2).

Chatterjee, R., & Kuenzi, A. (n.d.). MERGERS AND ACQUISITIONS: THE INFLUENCE
OF METHODS OF PAYMENT ON BIDDER’S SHARE PRICE. The Judge Institute of
Management Studies Trumpington Street Cambridge CB2 1AG, WP(6/2001).