Impact of mergers and acquisition announcements on share price

Abstract

Abstract 1) Introduction and context description: Corporate announcements regarding company's future strategy are an integral feature of today's capital markets. Of all these announcements we have seen that market's reaction in times of a major M&A deal is most pronounced. Corporate restructuring through mergers & acquisitions represents an increasingly important part of corporate and business strategy and in recent times it has become an extremely important element in the pursuit and maximization of shareholder value. Lately there has been an increase in volume of mergers and acquisitions happening in India. This work tries to focus on analyzing the market reaction in India towards the merger & acquisition announcements. It also tries to understand and analyze the possible factors that investor looks for in each type of announcement that determines the eventual market reaction. 2) Research questions: 1. M&A announcements have a distinct effect on share prices 2. Shareholders of Target Firms benefit more from M&A announcements compared to bidding firms 3. Size of the M&A deal has a bearing on the market's reaction 4. Overseas acquisitions are valued more by the market 3) Methodology: The methodology employed to analyze the stock market response to the merger and acquisition announcements was an event study. The aim of this methodology is to determine the reaction in the share prices to the announcement of certain relevant events. Event studies attempt to estimate that to what extent returns on a share differ from those expected if such event had not taken place. Concerning this, the null hypothesis assumes the non-existence of abnormal returns. These abnormal returns are defined as the difference between the actual returns observed and those expected according to the market model. The estimation of the market model was carried out using data from an interval of 150 days (t = -180 to -30) which constituted the estimation window. The effect on M&A deal was studied in an event window of 5 day (t =-2 to +2) where t = 0 is day of announcement. 4) Findings: (i) M&A deal announcements do impact share prices of firms involved in the financial transaction. Abnormal Returns in range of 1.7% to 1.8% were seen on average for date of announcement (ii) There are no gains post dates of announcement. Most of the impact of M&A deal is seen in pre-announcement period due to market anticipation. (iii) No difference in returns to shareholders of bidding and target firms (iv) Overseas acquisition has a greater impact on market prices on day of announcement but overall in the event window there has been no significant difference in cumulative returns. (v) Too small or too large deals have low impact on date of announcement or in the event window. Medium size deal (defined as 100 to 500 crores deals in this study) are the ones that mark most activity in terms of abnormal returns for the firms involved. 5) Limitations of the study: For few research hypotheses sample set was of small size, so while trends from such tests are perfectly admissible but abnormal return figures should not be taken literally. 6) Scope for further work: Impact of corporate restructuring could be studied further by analyzing effect of announcements of asset sales, spin off, divestitures etc. on share prices.