CHAPTER - 1 CHAPTER - 1

INTRODUCTION INTRODUCTION
1.1 Acquisition
Acquisition is the purchase of a smaller firm by a large company or sometime the
smaller firms hire or acquire the management control of the large firm but it is very rare
acquisition. The acquisition can be friendly or hostile. In friendly acquisition the both
the companies are involved in negotiations and in hostile acquisition the target
company is un willing to be bought and the board of directors have no knowledge of
the offer. There are four types of acquisition, i.e. Cash alone, Stock alone, Combination
of stock and cash, Techniques of reverse merger.
1.2 Merger
erger can be defined as when two firms combine together to form a single new
company rather than separately owned and operated. !ften firms of same si"es are
merged together. Types of mergers are given as Conglomeration, #ori"ontal merger,
$ertical merger, arket e%tension merger.
ergers and acquisitions are used increasingly in today&s global economy for
improving competitiveness of companies through gaining greater market share' it is
quite helpful in spreading the portfolio to decrease their business risk to enter new
markets and geographies and capitali"ing on economies of scale. ergers and
acquisitions are the foremost strategic option for organi"ations to consider having
competitive advantage over its competitors. The phenomenon of erger and
Acquisition is not new in the world. There was a great e%plosion of mergers and
acquisitions that took place in ()*+. Several researches were conducted to find out its
impact on business. any researches were done to analy"e and quantify the cost and
benefits of merger and acquisition. In the ,SA since the early ()++s, there have been
si% distinct waves of mergers and acquisitions, each with its distinct characteristics and
outcomes. There was a drive for market share, followed three decades later by a longer
and more ambitious wave as companies connected together different elements of the
value chain, from raw materials and production through to distribution. This research is
carried out to find the effect of mergers and acquisitions on the company&s performance
with the perspective of -akistan&s Companies which are merged and acquired.
1.3 1.3 Obecti!e " Pur#ose o$ t%e Rese&rc% 'tu() Obecti!e " Pur#ose o$ t%e Rese&rc% 'tu()
This research study will focus on certain mergers and acquisitions that took place in
-akistan. The performances of these firms are analy"ed after mergers and acquisitions.
The ob.ective of this study is/
To find out the performance of corporation before and after merger and
acquisition.
To give suggestion and recommendation for merger and acquisition.
1.* 1.* 'COPE O+ THE 'TUD, 'COPE O+ THE 'TUD,
The research will be limited to -akistan mergers and acquisitions that involve listed
companies of 0arachi stock e%change which will be merged and acquired, so different
variables will be selected to find out impact of mergers and acquisitions. It will focus
on different variables of the pre and post mergers 1 acquisitions of the same firms and
will not be comparing to other referenced group. The si"e of the firm, types of mergers
and acquisitions and method of transactions will be not consider in this study.
CHAPTER - 2 CHAPTER - 2
-ITERATURE RE.IE/ -ITERATURE RE.IE/
,sman, ehboob, ,llah, 1 2arroq 34+(+5, according to this report they used different
accounting ratios to identify the performance of manufacturing companies before
merger and after merger and then compared these companies to their industrial peers.
They also used the paired T test to find out significant change between control ad.usted
post merger periods. In last they concluded that post merge firms outperformed.
0umar, 6a.ib 34++75, e%amined the characteristics of target and acquirer firms of India
which were merged from period of ())8 to 4++9. Their study suggested that the firms
with lower price to earnings ratio were target for acquisition. The empirical analysis of
fifty :reek companies was involved in merger and acquisition during the period ())*;
4++4 was looked using financial and nonfinancial variables, they found that the
earnings before ta% to net worth and return on asset for the sample were decreased after
merger and acquisition, the liquidity ratios do not show any important decrease in value
for the post merger and acquisition and the solvency analysis were observed to be
decreased in values.
<un <u 1 #ung 34++=5, said merger and acquisition had became inevitable. In their
study big manufacturing companies were e%amined to find out the effect of merger and
acquisition on these companies. In their research they focused on the output value of
industry. 2or finding out the value of output they used method of enterprise valuation to
calculate the synergy of merge firms and also three types of betas were used. In last of
the research they confirmed that the policy making play a vital role to give value to
output.
yeni, 34++75, pointed out the impact of merger and acquisition on the share price and
dividends. 2or the research sample of 7) mergers from period of ())) to 4++= was
conducted and event study methodology 1 descriptive statistic method and also paired
t;test was used. The result showed negative abnormal return of targeted companies at
time of annoucement of merger. !n the other hand dividend for the targeted companies
increased after merger.
>ragun 1 #oward, 34++85, carried a research regarding the effects of mergers and
acquisitions on shareholder value from the period of ())7 to 4++(. The research
focused on the retail sector in ?urope. The findings of the research showed that
shareholders of target firms in the retail sector were earning abnormal positive returns
during the merger activity. The ratio of abnormal returns in the retail sector in ?urope is
smaller than the banking sector and the results showed that retail mergers and
acquisitions were not much different from those in the banking sector. It was concluded
at the end that positive abnormal returns were generated through the merger activity.
@echer, 34+++5, conducted a study on the mergers in the banking industry from the
period of ()*+s to ())7. The research was focused at determining that how bank
mergers affected the wealth of shareholders of target firms. The findings of the study
showed that shareholders of target firms earned positive abnormal returns. A large
sample of banks merger was used for different period of days and find out effect. The
result that was obtained was not same for different time period.
!llinger, Aguyen, @layney, Chambers, 1 Aelson 34++B5, carried out a research on food
industry mergers and acquisitions which were highly productive and their labor
productivity improved after acquisition. They concluded that merger and acquisition
yield synergy. They said if plants had low labor productivity before merger and
improved after merger then they had .ust average labor productivity after the merger
and might not e%erted pressure on competitors. The acquired firm were efficient before
acquisition and enhance their productivity after, acquired plants had to have better
average labor productivity afterward could force other to improve or e%it the industry.
c:uckin 1 Aguyen 3())=5, found in their research that the change in ownership had
a positive impact on labor productivity. It was noticed that it increased labor
productivity growth for small firms but not for large ones. They concluded that acquirer
firms buy poorly performing large targets because they have good assets that appeared
to be worth and make smaller acquisitions for synergistic reasons.
c:owan 1 Sulong 34++*5, argued on the effect of the announcement of merger and
the acquisition on the stock price of the company, for identification of this behavior
they studied two banks. 2or their research they used event study technique, the AaCve
model and market model. In market model they used parameters aD+, bD( to find out
abnormal returns from mergers and acquisition completion announcement date and to
analy"e the effect of merger and acquisition completion announcement on bank returns.
At the end they concluded from the research those merger and acquisition completion
announcements were treated as positive for the market.
6hoades 3())*5, investigated the efficiency impact of bank mergers by adopting case
studies of nine mergers in America. In his research he employed the same basic
analytical framework in all of the case studies such as financial ratios, econometric
tools and the effect of the merger announcement on the stock of the acquired and
acquiring companies. All of the mergers resulted in clearly cost cutting in line with pre
mergers. 2our of the nine mergers were significantly successful in improving
efficiency but five were not improved. The most frequent and serious synergies
e%perienced in bank mergers that increase bidder returns relative to nonfinancial
mergers was une%pected difficulty in integrating data processing systems and
operations.
ohibullah, pointed out the impact of culture on the merger and acquisition and its
success and failure rate. In this paper he identified the reasons that why most of the
merger and acquisition were failed. #e highlighted the four main clashes to culture. I.e
ambiguity and communication problem with in the merged entity, management of
culture integration, improper acculturation process among merged firms, the
acquisitions and organi"ation culture.
:ilkey 3())(5, argued that the high percentage of failure was due to the fact of those
mergers and acquisitions are still designed with business and financial fit as primary
ob.ective, leaving psychological and cultural issues as secondary concerns. A close
e%amination of these issues could have brought about a learning process directed at
successfully managing mergers and acquisition.
antravadi 1 6eddy 34++*5, tested that industry being merged had impact on the
operating performance of the company or not. The e%amined some pre and post merged
financial ratios with the sample of publicly traded companies between ())) till 4++8.
The result showed that there was a differential impact of merger for different industry
sectors in India. They concluded that type of also make a difference to post merger
operating performance of the company.
artynova, !osting, 1 6enneboog 34++75, investigated the long term profitability of
companies acquired in ?urope and found that both acquiring and target firms
significantly outperformed the referenced group in their industry prior to the acquisition
but the profitability of the combined firm decreased significantly following the
acquisition. #owever the decrease became insignificant after controlling for the
performance of the control sample of referenced group companies.
0ruse, -ark, 0wangwoo, 1 Su"uki 34++85, e%amined the long term operating
performance of Eapanese companies using a sample of =B mergers of manufacturing
firms from the period of ()B) to ())7. In research they e%amined the cash flow
performance of merger companies for the period of five years and the study found
evidence of improvements in operating performance, and also that the pre and post
merger performance was correlated. The study concluded that control firm ad.usted
long term operating performance following mergers in case of Eapanese firms was
positive but insignificant and there was a high correlation between pre 1 post merger
performance.
Finder, C, 1 Crane 3())45, analy"ed the operating performance of banks mergers and
acquisitions that took place in Aew ?ngland from ()*4 to ()*7 period. !f these forty
seven mergers sample the twenty five were consolidations of bank subsidiaries owned
by the same holding company. In this research they focused on the acquirer and
targeted firms for one year before the merger and compare it to performance one and
two years after merger and acquisition. The performance of merged banks was ad.usted
by the performance of all non merged banks in the same state. The results showed that
mergers did not result in improved operating income as by net interest income added
assets to net non interest income.
Cornett, illon, 1 Tehranian,3())45, e%amined the large holding companies mergers
occurred from ()*4 to ()*7 period. In the research they found out the profitability of
firm by comparing the cash flows returns on the market value of assets and it improved
after the merger. They viewed the market value of assets to measure the standardi"ing
income. Then they found that net income to assets to measure of bank profitability
which did not changed by a clear amount.
0allunki 1 -yykko 34++*5, investigated in their research that acquirer&s research 1
development before merger and acquisition could create a long term performance of
merger and acquisition or not. They argued that the stock market reaction was not good
to the gains from acquired research 1 development in technology and it overreacted to
the direct costs associated with mergers and acquisition. 2or this they used 9 factors
model abnormal stock returns. The stock price of the acquirer in technology was
understated because of the correction occurred as investors responded to the more
prominent signal of earnings when they were reported in the period of post acquisition.
In last they concluded from the research that technology mergers and acquisitions are
beneficial for acquiring firms in the long term and it is the most important sources for
benefits which the market recogni"ed lately.
#iggins 1 6odrigue" 34++B5, carried out a research on the motive behind mergers and
acquisitions and said that there are many motives for mergers and acquisition, few of
these for to generate value for shareholders. They found in technological industries the
aim of mergers and acquisition was to enhance the research and development
operations of the acquiring firm because technology firms needed to find out to access
other technologies in a way to supplement their technology dependent operations. They
concluded from the research that mergers and acquisitions provide an acquirer with
means to enhance its research 1 development activities to increase its cash flow in the
future.
Chan, Fakonishok, 1 Sougiannis 34++(5, in the research paper they suggested that
because of the uncertainty of the future and its benefits from the research and
development e%penditures of the firm the stock prices were not added to the value of a
firm&s research and development benefits.
CHAPTER 0 3 CHAPTER 0 3
METHDO-O1, METHDO-O1,
3.1 'AMP-IN1
This research will be carried out to find the performance of different companies before
mergers and acquisitions and after mergers and acquisitions, which is listed on the
0arachi stock e%change will be selected. The sample consists of different merged and
acquired companies, i.e. Abbot Faboratories Ftd. and :la%o Smith 0line 3:S05.
>ata will be collected for years before mergers and acquisitions and for the years after
mergers and acquisitions. Seven variables like sales, profits, share price, asset, equity,
return on equity and return on asset were included to measure the impact of mergers
and acquisitions that took place.
3.2 DATA " .ARIA2-E'
The data which is used in this research is panel data because in this research yearly data
will be analy"ing and the different variables are discussed below.
3.2.1 '&3es
Sale is the commercial activity of selling products or services for the purpose to earn
money in return or other compensation. In this research all the sales data will in
millions.
3.2.2 Net Pro$it
Aet profit is defined as the money or earning which is left over after serving all the
administrative and all organi"ation e%penses and also the ta%es.
Aet profit D :ross profit G overheads G ta%es
3.2.3 '%&re Price
Share price is the price or value of a stock of a company. Share price gives much
information about company.
Share price D Total equity divided by numbers of shares
3.2.* Asset
Corporation that owned any economic value items which can be converted into cash.
2or e%ample cash, securities, accounts inventory, account receivable and other
properties.
Asset D liabilities H owner equity
3.2.4 Equit)
?quity is defined as the ownership interest in an organi"ation. Interest may be in form
of common stocks or preferred stocks. ?quity can be referring as book value of the
organi"ation.
?quity D Total asset G Total liabilities
3.2.5 Return on &sset 6ROA7
This ratio tells how much a company generates by utili"ing its assets, if the value of
revenue generated is greater than the value of total assets than it means the company is
earning profit.
6!AD Aet profit divide by Total asset
3.2.8 Return on Equit) 6ROE7
6eturn on equity gives a measure that how much return a shareholder earned on the
amount he has invested in the business. If the ratios result is greater than one it means
that shareholder earned.
6!? D Aet profit divided by Total equity
3.3 DATA CO--ECTION9
Secondary data collected through
Annual reports of different companies,
2inancial Eournals and news papers,
?conomic reviews and articles,
Internet 3financial web portals5.
Iith the help of literature review, the following hypotheses were sat as per requirement
of the ob.ective of the research.
3.* H,POTHE'I'
The following are the hypothesis for my study.
#(/ The Sales of the merged companies are improved.
#4/ The -rofit of the merged companies is improved.
#8/ The Share price of the merged companies is improved.
#9/ The Asset of the merged companies is increased.
#=/ The ?quity of the merged companies is increased.
#B/ The 6!A of the merged companies is improved.
#7/ The 6!? the merged companies is improved.
RE+ERENCE'
@echer, >. 34+++5. The Valuation Effects of Bank Mergers. Eournal of Corporate
2inance.
Chan, F., Fakonishok, E., 1 Sougiannis, T. 34++(5. The Stock arket $aluation of
6esearch and >evelopment ?%penditures. Journal of Fianance .
Cornett, illon, ., 1 Tehranian, #. 3())45. Changes in Corporate -erformance
Associated with bank acquisition. Journal of Financial Economics .
>ragun, >., 1 #oward, ?. 34++85. Value Effects of Corporate Consolidation in
European Retailing. International Eournal of 6etailing and >istribution
management.
:ilkey, 6. 3())(5. The psychodynamics of upheavalintervening in merger and
ac!uisiton transaction. San 2rancisco/ Eossey;@ass.
#iggins, ., 1 6odrigue", >. 34++B5. The !utsourcing of 61> through Acquisitions
in -harmaceutical industry. Journal of Financial Economics .
0allunki, E. -., 1 -yykko, ?. 34++*5. "oes ac!uirer R#" level predict post$ac!uisition
returns% >epartment of Accounting and 2inance, ,niversity of !ulu.
0ruse, T. A., -ark, #. <., 0wangwoo, 1 Su"uki, 0. 34++85. &ong term 'erformance
follo(ing Mergers of Japanese Companies. American 2inance Association
meetings in Iashington >.C.
0umar, 6. 34++75. Characteristics of merging firms in )ndia *n Empirical
e+amination. Eournal of decision makers, 84 3(5, 47;99.
Finder, C, E., 1 Crane, >. @. 3())45. @ank ergers/ Integration and -rofitability.
,ournal of Financial -ervices Research .
antravadi, -., 1 6eddy, A. $. 34++*5. -ost;erger -erformance of Acquiring 2irms
from >ifferent industeries in India. )nternational Research Journal of Finance
and Economics .
artynova, ., !osting, S., 1 6enneboog, F. 34++75. The long$term operating
performance of European *c!uisitions. Juantitative Analysis and 6ecent
6esearch.
c:owan, C. @., 1 Sulong, K. 34++*5. M#* *nnouncements .n -tock 'rice Behavior
and Financial 'erformance Changes. International @usiness 1 ?conomics
6esearch Eournal.
c:uckin, 6., 1 Aguyen, S. 3())=5. .n &a/or 'roductivity and 'lant o(nership
change. The 6and Eournal of ?conomic.
ohibullah. )mpact of Culture on Mergers and *c!uisitions. ,niversity of Science and
Technology.
yeni, I. 34++75. The impact of food and /everage mergers on the shareholder value
(ith the specific refrence to -outh *frica.
!llinger, ., Aguyen, S. $., @layney, >., Chambers, @., 1 Aelson, 0. 34++B5. Food
industry merger and ac!uisition lead to higher productivity. ?conomic research
services.
6hoades, S. 3())*5. The efficiency effects of bank mergers. Journal of Banking and
Finance .
Scholtens, @., 1 >e Iit, 6. 34++95. *nnouncement Effects of Bank Mergers in Europe
and 0-. 6esearch in International @usiness and 2inance.
,sman, A., ehboob, ,llah, A., 1 2arroq, ,. S. 34+(+5. Relative .perating
'erformance of Merged firms in 'akistan. ?uro .ournal.
<un <u, #., 1 #ung, C. <. 34++=5. Valuation of Tai(an TFT &C" industerial merger
and ac!uisiton. Institute of anagement of Technology, Aational Chiao Tung
,niversity.