india going global.indd - The IIPM Think Tank

RESEARCH
marily due to efficient utilization and rearrangement of
resources (Jarrell, Brickley and Netter, 1988). The logic
is to achieve higher efficiency gains by combining two
entities that will contribute and complement each other’s
performance. Buyers will recognize specific complementarities
between their firm and the target. Although both
firms are performing well but the two are believed to
do even better when the two are combined, whatever
maybe the motivation the mergers must result in efficiency
and economies. Empirical research investigating
the efficiency of M&A has failed to provide unequivocal
results. In one of the most comprehensive and classical
study (Ravenscraft and Scherer, 1987a, 1987b), employing
comprehensive and narrowly disaggregated accounting
data it examined the mergers in the US in the sixties. It
concluded that these mergers were essentially failures,
more recent studies (Scherer, 1999, 2002) provide mixed
evidence. These studies show that some mergers yield
significant efficiencies while others fail because either
they bid too much or because of corporate
culture mismatches, incentive
failures or clumsy implementation.
Likewise, Mueller and Burkhard
(1999) found little evidence of efficiency
gains. They attributed the
inefficiency due to the lack of integration
of organizations; similar
results were reported by Bhuyan
(2002). Likewise in a study one of
hundred and sixteen mergers by
Copeland, Kotler and Murrin (1990)
it was that only 23% were successful
while 61% registered negative results. Porter (1987) and
Young (1981) also arrived at similar results. However,
Lichtenberg and Siegel (1992) reported significantly improved
labour productivity after the implementation of
acquisition programs.
McGuckin Nguyen (1995) found significant positive
relationship between labour productivity growth and
change of ownership. They also concluded that buyer
firms acquire poorly performing plants because they are
good assets with substantial positive potential which can
be utilized for enhancing values of the combined firm.
Mixed results relating to impact on efficiency notwithstanding,
a sharp rise in the M&A activity in both
developed and emerging markets has lead to a plethora
of research by academics as well as practitioners to find
whether this activity is leading to justifiable economic
gains by creating value for the owners or not. Research
studies have mostly focused on finding the quantum of
value generation or value destruction and how the gains
and losses of M&A transactions are shared between the
54 Need the Dough July-October - 2007
In efficient markets,
market value and stock
registers changes
around merger
announcements to fully
capture and reflect the
economic gains from
the merger
targets and the acquirers. As stated above if the M&A
activity have the capability to improve the efficiency
through internal management change and unlocking
of synergy, the activity must demonstrate evidence of
significant value creation. Besides, an investigation in
this issue is important for it may have significant policy
implications for regulators. Needless to say, objective
assessment of the results of these transactions is necessary
to assess whether society’s resources are being put
to efficient use or not.
Event Studies:
Majority research in the area of financial study of M&A
has largely sought to address the issue of value creation
and destruction for shareholders by employing the event
study methodology initiated by Fama, Fisher, Jensen
and Roll (1969). The event study methodology asserts,
if combined stock prices rise in the few days surrounding
merger announcements, it must be because rational stock
market investors anticipate future
earning gains. The theoretical foundation
rests on the assertion that
in efficient markets, market value
and stock registers changes around
merger announcements to fully capture
and reflect the economic gains
from the merger. Empirical studies
also have more or less unanimously
proven the theoretical assertion.
Event studies have found increase
in shareholder value of target firms
as a manifest of significant positive
cumulative abnormal return around merger announcement.
Be that as it may the methodology is fraught with
serious flaws. First, the findings showing positive shareholder
value for target firms around merger announcement
do not really mean much. Partly because this is
exactly what one would expect to happen, for target
shareholders they must receive a premium if they have
to handover their stake to the acquiring firm. Moeller
Schlingmann and Stulz (2004) report that between 1980
and 2001 acquiring firms paid a mean premium of 68%
for large firms and 62% for small firms. The offered
premiums may in fact be overpayments (Roll, 1986).
Secondly, event study conclusions rest strictly on the validity
of the assumption that markets are efficient. There
is plenty of evidence to show that stock market value may
temporarily deviate from the fundamental levels (Healy,
Palepu and Ruback, 1992). Mitchell, Pulvino, and Stafford
(2004) also indicate that announcement period of
normal return is due to merger, arbitrage and short-sell-