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In Indian industry, the pace for mergers and acquisitions activity picked up
in response to various economic reforms introduced by the Government of
India since 1991, in its move towards liberalization and globalization. The
Indian economy has undergone a major transformation and structural change
following the economic reforms, and “size and competence" have become
the focus of business enterprises in India. Indian companies realized the
need to grow and expand in businesses that they understood well, to face
growing competition.
Shareholders of the troubled Bank of Rajasthan Ltd (BoR) are set to get 25
shares of ICICI Bank Ltd for 118 shares of BoR in the ratio of 4.72:1
BoR promoter Pravin Kumar Tayal termed the proposed merger as a “win-
win” situation for all—the banks, their employees and investors.
Indian pharma industry registered its first biggest in 2008 M&A deal
through the acquisition of Japanese pharmaceutical company Daiichi
Sankyo by Indian major Ranbaxy for $4.5 billion.
The Oil and Natural Gas Corp purchased Imperial Energy Plc in January
2009. The deal amounted to $2.8 billion and was considered as one of the
biggest takeovers after 96.8% of London based companies' shareholders
acknowledged the buyout proposal.
In November 2008 NTT DoCoMo, the Japan based telecom firm acquired
26% stake in Tata Teleservices for USD 2.7 billion.
India's financial industry saw the merging of two prominent banks - HDFC
Bank and Centurion Bank of Punjab. The deal took place in February
2008 for $2.4 billion.
Tata Motors acquired Jaguar and Land Rover brands from Ford Motor
in March 2008. The deal amounted to $2.3 billion.
2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8
billion making it ninth biggest-ever M&A agreement involving an Indian
company.
In May 2007, Suzlon Energy obtained the Germany-based wind turbine
producer Repower. The 10th largest in India, the M&A deal amounted to
$1.7 billion.
Motives behind M & A
3. Cross selling: For example, a bank buying a stock broker could then
sell its banking products to the stock brokers customers, while the
broker can sign up the bank’ customers for brokerage account. Or, a
manufacturer can acquire and sell complimentary products.
5. Taxes : A profitable can buy a loss maker to use the target’s tax right
off i.e. wherein a sick company is bought by giants.
Advantages of M&A’s:
If both companies are in good shape, then joining them together will
likely make each entity stronger; if one company is in trouble, then the
other will be saddled with the problems of the other. It will also have an
impact on assets and liabilities of the 2 companies.
If the acquirer is paying less than or equal to what the smaller business is
worth, this might not be a good sign, but if they are paying a premium for
the other company, this is a sign that the acquisition is remunerative and
will increase their overall worth.
Research Objective
Literature Review
Introduction
Researchers have studied the effects of M&A on the value of both the
Acquiring firm and the bidder firm. The evidence on mergers indicates that
the stockholders of target firms have earned significant abnormal/excess
return not only around the announcement period, but also in the weeks after
the announcement. Jensen & Ruback (1983) review 13 studies that
examine returns around takeover announcements and report an average
abnormal return of 30% to target stockholders in successful tender offers and
20% to target stockholders in successful mergers. Jarrell, Brickley, and
Netter (1988) review the results of 663 tender offers made
between 1962 to 1985, and note that premiums averaged 19% in the 1960s,
35% in the 1970s, and 30% between 1980 and 1985. Other studies report
an increase in the stock price of the target firms prior to the M&A
announcement, suggesting either a very perceptive financial market or
leaked information about prospective deals.
Research Methodoly:
Findings:
The results show that the target’s returns are negative but not statistically
significant and the bidder’s returns are negative and statistically significant
after the announcement date.
Fauzias and Ruzita (2003) show that the market reaction to three
announcements of corporate restructurings by the Malaysian Resources
Corporation were statistically significant in terms of market reaction to each
announcement. Fauzias and Ruzita’s test results indicate that the market
reacted to the initial restructuring announcement, increased in reaction to the
second restructuring announcement, and produced mixed results to the third
restructuring announcement. Houston, James, and Ryngaert (2001) examine
the factors that explain merger gains in 64 large banks and find that the bulk
of the gains are from cost reductions particularly through reduction in
geographical overlap. Rhoades (1998) investigates the efficiency effect of
bank mergers by using case studies of nine mergers in America. He
employs the same basic analytical framework in all of the case studies, such
as financial ratios, econometric cost measures, and the effect of the merger
announcement on the stock of the acquiring and acquired firms. All nine of
the mergers resulted in significant cost cutting in line with pre-mergers
projections. Four of the nine mergers were clearly successful in improving
cost efficiency but five were not. The most frequent and serious synergies
experienced in bank mergers that increase bidder returns relative to non-
financial mergers was unexpected difficulty in integrating data processing
systems and operations.