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Mergers, Acquisitions and Wealth Creation: A Comparative Study in the Indian Context

Volume 21, Number 3; Article by B Rajesh Kumar, S Paneerselvam; September, 2009

B Rajesh Kumar is Assistant Professor,Institute of Management Technology, Dubai

S Paneerselvam is Assistant Professor, Post Graduate Department of Management Studies, Siddaganga Institute of Technology, Tumkur

The efficient capital market hypothesises that share prices fully and instantaneously reflect all new information. Thus, the value of expected benefits from merging would be reflected in share prices when the merger is first anticipated. Further, stock prices provide unbiased signals for efficient resource allocation.

 

In this context this paper examines the effect of mergers and acquisitions M&A on the wealth of shareholders of acquirer and target firms on a comparative basis. The study is based on different time window periods surrounding the announcement of M&A from 1998 to 2006 it uses four subsets of sample consisting of 252 acquirers and 58 targets involved in acquisitions and 165 acquirers and 18 target firms involved in mergers.

 

The results indicate that M&A are positive net present value activities for bidding and target firms. The average announcement day excess returns were highest for target firms involved in mergers, followed by acquirer firms. The next higher gains were for acquirer firms involved in acquisition. Bidding firms gain more abnormal returns than target firms involved in acquisitions in different time windows. On the other hand, target firms gain more in mergers compared to acquirers. The analysis of the abnormal gains on announcement day indicates that the target firms involved in mergers had the maximum gain of 3.24% with statistical significance at 10% level. The acquirer firms involved in mergers had a gain of 1.59% with statistical significance at all levels. A comparative analysis of the acquirer firms of acquisitions versus that of acquirer firms of mergers reveals that the abnormal gains were greater for merger acquirers. From the perspective of bidding firms, the merger process could be termed as more value creating than the acquisition process.

Reprint No 09304