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Journal of Indian Institute of Management Bangalore

IIM Bangalore offers Degree-Granting Programmes, a Diploma Programme, Certificate Programmes and Executive Education Programmes and specialised courses in areas such as entrepreneurship and public policy.

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The Case of RIL and RPL Merger

Volume 17, Number 3 Article by A K Mishra and Rashmi Goel September, 2005

Returns to Shareholders from Mergers: The Case of RIL and RPL Merger :

Mergers and acquisitions (M&As) are an accepted strategy for corporate growth. While they may create value, mitigate agency problems associated with a firm's free cash flow, enhance the firm's market power, or help utilise tax credits, the crucial question that academics have discussed for long is whether M&As create shareholder value.

A K Mishra and Rashmi Goel try to evaluate the financial implications of the Reliance Industries (RIL) and Reliance Petroleum (RPL) merger deal on their shareholders' wealth. Beginning with a survey of the literature on the value created by mergers, they examine the logic behind the merger that catapulted RIL into being the second largest Indian company in terms of market capitalisation and revenue and the third most widely held company in the world with more than 35 lakh shareholders. While the cost advantages and growth prospects were admitted, a study was undertaken, on the basis of the short term performance of the merger, to examine whether shareholders of merging firms would gain or lose from the merger. The profitability for shareholders was investigated by examining the daily excess returns that accrued to the shareholders around the date of announcement of the merger deal. The results showed that positive excess return occurred to the shareholders of the target company RPL and negative excess returns to those of the acquiring company, RIL. Despite the deal appearing to be favourable to the shareholders of RIL, they lost and RPL shareholders gained. This deal was led by the `empire building' motive along with the intention of spreading the risk and return more equally among the shareholders of the two companies.

The authors suggest that similar studies can be carried out on the larger set of merger deals. The general motives behind the M&A process among Indian companies may be explored.

Reprint No 05306