An Empirical Analysis of Selected Firms of Across Corporate Sectors in India 4.

Introduction of the Study

Dramatic events like mergers, takeovers, restructuring, and corporate controls are the developments that have become central focus of public and corporate policy issues all around the globe. For any firm, the prime objective is to grow profitably, which can be achieved either through the process of developing new products (external) or by expanding (internal) the capacity of the existing products. The external growth can be achieved by merger& acquisition (M&A). The last decade of 20th the century and the first decade of 21st century has seen a substantial increase in both the number and volume of M&A activities. In fact, consolidation through M&A has become a major trend across the globe in the recent past. This wave was driven by globalization, technological changes, and market deregulation and liberalization. Around the globe, almost all industries are going through reorganization and consolidation by M&A, which has been predominant in sectors like steel, aluminum, cement, auto, banking and finance, computer software, pharmaceuticals, consumer durables, food products, agro-chemicals and textiles. The M&A activity has its impact on various diverse groups such as corporate management, shareholders and investors, investment bankers, regulators, stock markets, customers, government and taxation authorities, and society at large. Therefore, it is not surprising that it has received considerable attention at the hands of researchers world over. A number of studies have been carried out abroad especially in the developed capital markets of Europe, Australia, Hong Kong, and US. These studies have largely focused on different aspects, viz., (a) the rationale of M&As, (b) allocational and redistribution role of M&As, (c) effect of takeovers on shareholders' wealth, (d) corporate financial performance, etc. Some studies have also been carried out to predict corporate takeovers using financial ratios. M&As, being a new phenomenon in India, has not received much attention of researchers. In fact, no comprehensive study has been undertaken to examine various aspects especially after the Takeover Code came into being in1997. This study has been undertaken to fill this gap. Until upto a couple of years back, the news that Indian companies having acquired AmericanEuropean entities was very rare. However, this scenario has taken a sudden U turn. Nowadays, news of Indian Companies acquiring foreign businesses are more common than other way round. The impact of information and communication technology (ICT) has further increased the pace and size of M&A, which helps in fast growth, tax benefit, diversification, bigness, market leader, cost advantage, competitive advantage, technology advantage, etc. To illustrate, the diversification and conglomerate types ofM&A dominated the business restructuring movement during the sixties. However, the eighties witnessed the mergers characterized by a return to specialization, and an enormous increase in real sizes. The merger waves in the U.S. in the 1980s

and afterwards are characterized by the strong relatedness between the businesses of the merging firms unlike the conglomerate mergers in the sixties and seventies. In constant dollar terms, the mergers during 1988 increased almost four to six times more than that of the value of mergers in the early seventies.

4.1 Literature Review Dash (2004) examined the economic consequences of mergers on the shareholders of the acquirer firm. The event study methodology which was employed to assess the extent of value creation by mergers, indicates that on an average mergers lead to value destruction, irrespective of their pattern over a long period of time and the destruction is relatively greater in case of unrelated mergers. The study draws a contradictory conclusion to the popular belief that the merger as a means of corporate salvation and declares it as a myth. Moeller and Sehlingemam (2005) analyzed the performance of acquirer firms through two major merger waves that occurred during that period. They found that over the period 1998 through 2001 shareholders in bidders lost $240 billion. They also found that even when the target shareholder benefits were taken into account the net effects were still negative $134 billion. They opined that the target shareholders gain at acquirer firm shareholders expense. Davi (2006) analyzed the prices paid by foreign corporate firms for acquisitions in the United States (US) relative to the price paid by US corporate firms for mergers. The data used were obtained from the Securities Data Corporation Platinum database and consist of a list of all M&As from 1980 to 2005 in which the target corporate firms was based in the United States. The findings indicate that foreign corporate firms do pay more for US acquisitions, and that this does result in significantly lower returns on M&As investment in the US by foreign corporate firms. Wells (2004) postulated that Event analysis (event study) is a standard methodology in financial economics to determine the impact of specific financial decisions on shareholder returns and expected firm profitability. The theoretical basis for the event analysis is based on the assumption that individual stock returns over time can be predicted to some degree. Researchers then observe the actual stock returns over the period of interest and compute the difference between the returns predicted and observed. If the difference (Abnormal return) is determined to be statistically different from zero, it may be concluded that the event under study did have an impact on stock returns and reflects the investors reaction to the event. According to McWilliams and Siegel (1997), event analysis methodology provides management researchers a powerful technique to explore the strength of the link between managerial actions and the creation of value for the firm. Evidence on the effect of M&A announcements on bidder firm stock prices is not accurate and, in fact, is contradictory, as empirical studies have shown mixed results. Cornett and De (1991) report positive abnormal returns to bidding firms in banking acquisitions.

Houston and Ryngaert (1994) suggest that samples that emphasize larger acquisitions are more apt to find negative bidder returns. Isabel Feito-Ruiz (2010) analysed family versus nonfamily firms returns under different legal environments when an M&A is announced. The database includes 124 M&As of European-listed firms (15 countries), with acquired firms being worldwide public or private firms (23 countries), over the 2002 to 2004 period. The findings showed that family ownership has a significant positive influence on acquirer shareholder M&A valuation. However, a major shareholder ownership of 32% has a negative effect. The authors also observed that a weaker legal and institutional environment in the target country has a positive influence on acquirer shareholder valuation. Indhumathi (2011) M&A becomes the major force in the changing environment. The policy of liberalization, decontrol and globalization of the economy has exposed the corporate sector to domestic and global competition. It is true that there is little scope for corporate firms to learn from their past experience. Therefore, to determine the success of a merger, it is to be ascertained if there is financial gain from mergers. The study was limited to a sample of corporate firms which underwent merger during the period of 2002-2005. It was proposed to compare the performance of the acquirer and target corporate firms before and after the period of mergers by using ratio analysis and t-test during the study period. The study found that the shareholders of the acquirer corporate firms increased their financial performance after the merger event.

4.2 Background of the Study

Need for the Study Merger is a routine event in the changed economic environment. Post- merger financial gain will be generated only when the two companies are worth more together than apart. Therefore, there is a need to study the wealth enhancement with respect to mergers, which can be helpful in assessing the success of merger. Many studies have been conducted to analyze both acquiring and target companies in the pre-merger period and more specifically, acquirer companies in the pre- and post-merger periods. It is equally important to analyze from the view point of the acquirer and target companies in the pre- and post-merger periods also. Hence an attempt has been made to study the financial performance of both acquirer and target companies in the preand post-merger period. 4.3 Problem Statement When the firm gets merged with other or acquired by the profit making firm, it benefits for both the firms, hence now-a-days all firms are interested in resorting to corporate restructuring in the form of M&A. However, the question often arises whether all the firms that are merged / acquired are ending up with maximization of shareholders wealth and improved operating performance? In some firms, the shareholders wealth gets reduced after it get merged / acquired. Hence, the present study is proposed to seek answers to the stated question by analyzing the impact of M&A on the firms performance of selected corporate firms in India corporate

considering three years period before and three years period after the process of M&A. The period of the study is from 2004 to 2010. i.e., pre merger period from 2004-2006; post merger period from 2008-2010. Many studies have been conducted to analyze corporate events like mergers, takeovers, restructuring and corporate controls. The researchers have generally focused on public and corporate policy issues, financial implications and method of valuation. However, most of the studies have deeply concentrated only on the analysis of financial performance of both acquirer and target companies in the pre-merger period and specifically compared the performance of acquirer companies during pre and post merger period. There has been no comprehensive analysis attempted from the view point of the acquirer and target companies in the pre- and postmerger periods. Hence, in order to fill this gap in research, the present study attempts to analyze the financial performance of both acquirer and target companies in the pre- and post-merger period.

4.4 Objectives of the Study

Primary Objective
To explore the insights of a corporate event named Amalgamation which is a major event by itself and it drags lot of attention and results into many drastic changes in market valuations of a firm.

Secondary Objectives:
 To verify existence of the abnormality in price and volume of the share as announcement of Mergers & Acquisition .  To analyze the bearing of such abnormality (if it does exists) on the Market Capitalization and Volumes traded on the stock market a month before and a month after the Amalgamation takes place for all the scripts under study.  To evaluate the pre and post merger financial performance of the acquirer and target companies.  To offer the findings, suggestions and conclusion.  To finding out the effect of M&A activities of companies on creation of additional wealth to their shareholders.  To measure the shareholders wealth and operating performance of selected sample Indian firms.  To Study the impact of M&A on liquidity, profitability and financial and operating risks of firms across industries in India after M&A.  To measure the cumulative impact of Amalgamation event and try to conceive a general trend based on it. 

4.5 Hypothesis
Ho#1-There is no significant improvement on the liquidity, profitability, and operating performance of acquirer firms across industries in India after M&A. Ho#2- There is no significant decline in financial as well as operating risks of acquirer firms across industries in India after M&A

5. Research Methodology
5.1 Research Design

The two inputs that are required for the event-study model are the events themselves, in this case M&A announcements, and historical stock price data (security prices and the reference index). They were both gathered from databases. In order to explore the effects of M&As in stock prices, this research limits its scope to companies that are either listed at one of the major European stock exchanges (London, Paris, Frankfurt, Madrid, Amsterdam) or on a US stock exchange (NYSE, NASDAQ).

5.6 Sampling Frame

Table 1: List of Sample Companies