ABSTRACT:
Mergers and acquisitions have been the utmost prevalent means of inorganic corporate extension over the years. It is widely used for restructuring business organizations. Companies conduct mergers and acquisitions based on strategic business motivations that are fundamentally economic in nature. This research study attempts to evaluate the impact before and after the financial performance of acquiring companies. This will be done by comparing the pre-merger and post-merger performance of the acquiring company in selected M&A in India over two periods – 2007-2008 (selected due to the 2008 global financial crisis) and 2012-2013 (many deals increased after 2010 and then again in 2012-2013) using selected financial ratios and a paired t-test for 5% significance.
INTRODUCTION:
Mergers and acquisitions (M&A) are defined as the consolidation of companies. The difference between the two terms, Merger is the joining of two companies to form one, whereas Acquisitions is one company being taken over by another. M&A is one of the important aspects of the world of corporate finance. The idea behind mergers and acquisitions is generally that two separate companies create more value together compared to standing alone. With the main goal of wealth maximization, companies are constantly evaluating various opportunities through mergers and acquisitions. In this case, synergistic value is always created by joining or merging two companies. Synergy value can be analyzed either through revenues (higher returns), costs (reduced costs), or cost of capital (reduced total cost of capital).
Obviously, the two sides of an M&A deal will have different ideas about the value of the target company: Its seller wants to value the company at the highest possible price, while the buyer will try to get the lowest price. That he can
However, there are many legitimate ways to value companies. The most common valuation method is to look at comparable companies in the industry, but deal makers implement a variety of other methods and tools when evaluating a target company. Some of them are as follows:
Comparative ratios. Below are two examples of the many benchmarks that receiving companies can base their bids on:
Price to Earnings Ratio (P/E Ratio) – With this ratio, the acquiring company makes an offer that is a multiple of the target company’s earnings. Looking at the P/E for all stocks within the same industry group will give the acquiring company a good indication of what the target P/E multiple should be.
Enterprise-Value-to-Sales (EV/Sales) Ratio – With this ratio, the acquiring company will again bid as a multiple of sales, being aware of the price-to-sales ratio of other companies in the industry.
REASON FOR MERGER AND ACQUISITION:
The reason behind mergers and acquisitions is that when two disparate organizations work together, they create more value than if they worked alone. Companies continue to evaluate various options through mergers and acquisitions with the primary goal of wealth maximization. The merger or merger of two companies in this case always creates synergistic benefits.
Revenues (higher returns), costs (lower costs) or cost of capital can all be used to determine the value of synergy (reduction in total cost of capital).
Both sides of an M&A negotiation will have different views on valuing the acquiring company: the seller wants to value the company as highly as possible, while the buyer wants to secure the best deal possible. However, there are a number of valid methods to determine the value of a company.
The most common way to value a company is to compare it to similar companies in the same industry, but dealers use a number of other approaches and tools to evaluate a target company.
BENEFITS OF M&A:
M&A are two permanent forms of business combinations used to direct, control, or manage a company’s operations. When buying a company, shareholders benefit from mergers and acquisitions because of the premiums offered to encourage the approval of mergers and acquisitions, as they provide a much higher fee than the stock rate. Companies typically engage in mergers and acquisitions to consolidate their market power and control.
- Synergy is created by combining two businesses that are influential enough to support the business rationale, financial growth and overall shareholder value over time.
- Competitive advantage – the combined assets of the new company help to gain and maintain a competitive advantage in the market.
- “Cost efficiency – The merger increases the company’s purchasing power, which helps negotiate bulk orders, leading to cost efficiency.”
- Improved product range and industry exposure – Businesses acquire additional businesses to expand their market reach and profit.
- A merger can Increase the marketing and distribution capabilities of the two organizations and open up new sales opportunities.
- A merger can also help a company’s reputation with investors: larger companies often have a better time raising funds than smaller companies.
- Economic valuation can encourage mergers and acquisitions to make full use of tax shields, improve financial control and take advantage of alternative tax benefits.
- Geographical or other equity investment: is aimed at smoothing the firm’s earnings results, which in turn smooths the stock price over time and gives conservative investors more confidence in the company. However, this does not necessarily mean shareholder value.
- Resource transfer: Because resources are allocated differently between organizations, the interplay of target and purchasing firm resources can create value by addressing knowledge asymmetries or pooling scarce resources. For example layoffs, tax cuts and so on.
TOP 3 MERGER AND ACQUISITION IN INDIA:
- Tata and Corus Steel-
Tata’s acquisition of Corus Steel in 2006 was valued at over US$10 billion. Tata’s opening offer was £4.55 per share, but after a bidding war with CSN, Tata raised its offer to £6.08 per share. After the merger, Corus Steel was renamed Corus Steel and the corporation became the fifth largest steel producer in the world.
- Walmart Acquisition of Flipkart-
Walmart’s purchase of Flipkart marked the company’s entry into the Indian market. Walmart beat Amazon in a bidding war and paid $16 billion for a 77 percent stake in Flipkart. In the deal, eBay and Softbank divested their stakes in Flipkart. Flipkart’s logistics and supply chain network has been expanded as a result of the transaction. Flipkart has already bought other eCommerce startups including Myntra, Jabong, PhonePe and eBay.
- Vodafone Idea Merger-
According to Reuters, the Vodafone Idea merger is worth $23 billion. While the acquisition created a telecom conglomerate, it is safe to say that the entry of Reliance Jio and the ensuing price war drove the two businesses to do so. Faced with increasing competition in the telecommunications business, the two companies struggled. The transaction has benefited both Idea and Vodafone as Vodafone now owns 45.1 percent of the merged firm, with the Aditya Birla group owning 26 percent and Idea owning the rest. On September 7, Vodafone Idea launched its new corporate identity ‘Vi’, marking the completion of the merger of the two companies.
CONCLUSION:
This article shows why organizations choose mergers and acquisitions and what incentives they receive as a result of the process. This can also be changed to a stock and flow model that can be simulated with the right inputs. The purpose of the study was to determine whether the type of purchase, i.e. domestic or cross-border, had a different impact on the performance of recipient firms. The results and analysis of the main financial indicators of the acquisition show that the impact of mergers differed between domestic and cross-border acquisitions. The type of purchase appears to have a significant impact on business performance, and it makes a difference. Financial accounts, such as the company’s profit and loss analyses, are considered the most important factors in determining the benefits of mergers and acquisitions. The success of mergers and acquisitions is determined by elements such as company profit and loss, market share, shareholder interest and company growth. The success rate can be easily determined by the market value of the company.
Author – Aviral Srivastava
B.A.LLB – UPES, Dehradun
REFERENCE –
- https://www.google.com/url?sa=t&source=web&rct=j&url=https://acadpubl.eu/hub/2018-118-21/articles/21e/84.pdf&ved=2ahUKEwji1aDqhsnwAhWmxDgGHQcSC3wQFjAEegQIExAC&usg=AOvVaw3vdauHrtigHWCiym4UQHsG&cshid=1620991335810
- Kar, R.N. and Soni, A. Mergers and Acquisitions in India: A Strategic Impact Analysis for the Corporate Enterprises in the Post Liberalization Period 2017
- https://www.moneycontrol.com/stocksmarketsindia/