Effects of Mergers and Acquisition on Shareholders Returns among UK Firms - Research Proposal Example

RESEARCH PROPOSAL TITLE Effects of Mergers and Acquisition on Shareholders Returns among UK firms RESEARCHER Ms./Mrs./Mr. (insert your names here) Department of (please insert your department here) Faculty of (please insert your faculty here) (Insert your college or university name here) SUPERVISOR Start with his/her title then his/her names (for instance Professor Bob Kelly) Department of (insert the name of the department your supervisor belongs) Faculty of (please insert his/her faculty here) (Insert college or university name here where your supervisor is attached to here) Student number: (insert your number here Lecturer: (insert your lecturer’s names here, remember start with the title) Table of Contents 1.0.Introduction---Background information 2 2.0.Literature review 4 3.0.Research Objectives 7 4.0.Research questions 9 5.0.Methods of data collection 10 5.1.Questionnaire 11 5.2.Interviews 11 5.3.Observation 12 5.4.Method of Data Analysis 12 6.0.Research Design 13 6.1.Location of the Research 13 6.2.Research Philosophy 14 6.2.1.Positivism 14 6.2.2.Interpretivism 14 7.0.Ethical Consideration 15 8.0.Time scale 16 1.0. Introduction---Background information Mergers and acquisition among United Kingdom firms became a trend during the 1970s and 1980s (Sing, 1998; Larcker, 1993), which came with the so called merger waves. As a matter of fact, mergers and acquisition did not start with Glaxo & SmithKline. While there is a reason as to why the trends have been common, the reason is that mergers and acquisition have had a unique impact on shareholders, especially among United Kingdom firms. Regardless, much studies and researches have been conducted concerning mergers and acquisition, especially ones that were focused on the impacts of mergers and acquisition on the returns of shareholders in United Kingdom. In addition, going by the research by Sudarsanam et al. (1996), the recent economic difficulties, besides a cut throat competition concerning the financial markets, bereave the possibility of poorly structured firms to survive, thus forcing these firms to collapse or undergo merger and acquisition without due consideration on shareholders. However, understanding the impacts of mergers and acquisition on returns of shareholders in United Kingdom firms should be pegged on the fact that studies concerning mergers and acquisition have declined since the early 1990s despite the fact that a number of issues still remain unresolved. In the past 2 years, there have been a number of studies that have undertaken studies on the impacts of mergers and acquisition on shareholders returns. For instance, Ryngaert and Netter, (2001) have argued that merger wave occurred mostly during the 1980s and such had interesting dimensions on the returns of shareholders. As a matter of fact, this research brings some connectedness with Hubris theory about mergers and acquisition and how recent mergers and acquisition can help in the understanding the impacts on shareholders’ returns. This theory posits that mergers and acquisitions in UK firms have had effects on values of merging firms and as such, shareholders’ returns have been fluctuated differently. The rationale of this study basing on the background information about mergers and acquisition shows that issues concerning shareholders or in the area of shareholders return effects still need to be addressed with regard to background information and existing literature on mergers and acquisition. For instance, the background information shows paucity of information concerning finance and accounting in general and where the transfer of returns from the targeted firms to the bidding ones occur in part (less than 50%) or as a whole (more than 50%). Additionally, efficient market hypothesis posits that shareholders are parties with full information and rational. Therefore with the information and rationality, they can make decisions regarding investment or take control of the firm. It is therefore prudent to assess whether this aspect can affect their returns positively. For instance, if research tools and data collection tools that this proposal suggest will show that the mergers and acquisitions impacts positively on the returns of shareholders then it will be worth discussing how mergers and acquisition can result in a decrease when it comes to the value of the acquiring firms without considerations of whether the merger or acquisition brought about a control interest. 2.0. Literature review One view that is apparent among scholars is that mergers and acquisition in among UK firms have been stimulated by firms’ desire to get more benefit emanating from firms that have undergone merging compared to total values or benefits if they operated independently (Mueller, 2007; Black, 2001). While referring to firms such as Virgin Group Holdings Ltd of the British Virgin Islands acquiring Northern Rock Plc of the UK, Bowman (2014) argues that mergers and acquisition have positively benefited shareholders when it comes to their return values. Based on hubris theory as defined above, it is apparent that the view held by Bowman (2010) does not consider the fact that mergers and acquisition as it was the case of Vista Equity Patners LLC of the USA acquiring Misys Plc of the UK for a reported value of £1.3 billion which led to the rationalisation of capacity. It is apparent increase in efficiency may come as a result of synergetic effects which in turn mean that there are synergetic benefits like operating synergy as well as financial synergy (Asquith and Kim, 2006). First, scholars such as Ran and Vermaelen (2012) have brought the aspect of operational synergy, financial synergy and managerial synergy. Ruback (2012) realizes that financial synergy is achievable in short and long term goals. A good example of short term gains that shareholders can accrue is the improved liquidity, price-earning effects and tax effects. The long term synergies encompass improved redeployment of capitals, elevated debt capacity and stabilized earnings. What Ruback (2012) tried to argue about is that shareholders pegged their hopes on the fact that intentions of mergers and acquisition are not just based on financial aims, but also on such managerial intentions as power needs and risk diversification. This view conform with the research by Schipper and Thompson (2004) that indicated that mergers are able to generate improved production techniques, increased market power and the asset redeployment to more profitable uses. Basically, these views shows that shareholders also tend to benefit or have their returns improved whenever firms undergo merger and acquisition. Shleifer and Vishny (2009) proposed, based on a case study on 15 firms in United Kingdom that corporate mergers in most cases are motivated by views such as displacement of inefficient managers, enhancement of monopoly or monopsony, gaining economies of scale or exploitation of tax reduction avenues. However, one hypothesis of mergers and acquisition is that its main aim it to attain value maximization (Stillman, 2008). It is from this perspective that scholars such as Ravenscraft (2000) have indicated that shareholders tend to gain more returns when firms merge or acquire one another. This view is contextualized by economic theory as postulated by Scherer (2001). He argues that mergers and acquisition are undertaking that have been able to generate valuable assets to companies and shareholders. Basing on this hypothesis, it therefore worth concluding that one of the critical responsibility of managers will be to improve returns of shareholders. This view is consistent with Sebenius (2002) who finds that any merger and acquisition should be able to meet investment views and targets of shareholders. It is from this point that scholars such as Ravenscraft and Scherer (1997) believe that mergers and acquisitions will always benefit returns of shareholders because if the move will contravene this view then they would not even approve proposals for mergers and acquisitions. What these scholars fail to tackle however, is that in as much as there could and a beginning marked by negative net present value investment, this should not mean that the merger proposal may not generate any gain to the shareholders of merging firm. On the other hand, there is a possibility that mergers and acquisitions may become detrimental to shareholders returns. This view is supported by scholars such as Mitchell and Mulherin (2010); Mikkelson and Partch, (2011). Their point of argument is based on recent cases with companies such as H&F Lux Holdco S.A.R.L. of Luxembourg acquiring CharterHouse Nadia 1 Ltd of the UK for a reported value of £1.1 billion. Basically, they believe in non-value maximizing hypothesis. Stillman (2008) for instance takes the view that instances of merger or acquisitions may not have any economic gains to the returns of shareholders. According to Scherer (2001), it is not necessarily vital for the managers of firms who participate in mergers and acquisition to display positive returns to the shareholders. Taking this argument within the context of UK firms, Canaccord Financial Inc of Canada as acquiring firm sought some other objectives other than the obvious positive economic gains which in this case included control of conglomerate empire or enter a new market which was not possible when it was working independently. Recent report by Mueller (2007) has shown that even strategic takeovers (takeovers meant to generate returns by a company getting involved in cash payments for firms in unrelated business) that were used to return gains for shareholders are no longer profitable for shareholders. Additionally, Black (2001) realized that some recent mergers and acquisitions in UK banking industry are sometimes driven by non-value maximizing intentions thus making it hard for managers to improve returns for shareholders. Apparently, what can be added to the argument as postulated by Black (2001) is that operating synergies may only be created when it comes to mergers and acquisition between firms related or same industries. Another school of thought that shows that shareholder returns may be impacted negatively by mergers and acquisition is the managerial hypothesis (Mitchell and Mulherin, 2010). Black (2001) argues that managers can use mergers and acquisitions as a tool to attain their own personal interests. Mueller (2007) see this approach as an anti-takeover theory, since managers act to maximise their own utility. 3.0. Research Objectives One critical objective of the research is to critically assess whether mergers and acquisition have had and continue to have a unique impact on shareholders return in United Kingdom. The objective has been chosen since it is the broad point about what the research hopes to accomplish and the desired outcome from the process of researching. Since United Kingdom firms operate with established legal frameworks that differ and compare significantly when dealing mergers and acquisition, the objective has focussed on long-term outcomes intended to ascertain recent trends in shareholders returns. In addition, the objectives introduces what is missing from the literatures reviewed thus identifying the gap in knowledge. The gap in knowledge that the proposal finds to be holding back the field is what the entire research will attempt to address thus providing the linkage or concordance between the identified objective and parts of central hypothesis earlier identified in the literature reviews. The second objective of the research is to assess whether there is any transfer of returns from the shareholders of target firms to the shareholders of bidding firms which is also essential in knowing the factors which influence the change in returns effect. Just as Mikkelson and Partch (2011) explain, research objective should illustrate how every research aim will serve the purpose. From this perspective, generally, while the objectives as stated above seem to be broad in their approach, they are focussed and practical when put as follows: 1. To critically compare quantitative and qualitative data from respondents from United Kingdom with a view to integrating such with literature reviews and understand the impacts of mergers and acquisition on returns of shareholders in United Kingdom firms. 2. Assess the effectiveness of transfer of returns from the shareholders of target firms to the shareholders of bidding firms by looking at the number of cases handled vis-à-vis mitigated cases The objectives on the other one hand has been designed to augur well with plans the research intends to take in order to deal with practical problem or ethical issues that may be encountered. The second objective further helps in having research plan, choosing interview theme and shaping the questions that will be asked during data collection. Again, the second aim is specific and thus linking the secondary research problem. Another point to note regarding these particular objectives is that they show that the research proposal will be looking for actionable information and knowledge from qualitative research and it is for this reason that the first objective is general thus helping to link the primary research problems. 4.0. Research questions In as much, the above sub-sections suggest one critical aspect; that a fundamental framework on understanding mergers and acquisition and impacts it has with regard to shareholders returns. For this to be attained, instances of mergers and acquisition have to be achieved through succinct research questions that not only encompass the sections suggested but also captures the tenets of dependent and independent variables. Hence, the following research questions have been identified with an aim of concretizing and solving research problems and or thesis statement: 1. What is the effect of mergers and acquisition on returns of shareholders in UK firms 2. Is any transfer of wealth from the shareholders of target firms to the shareholders of bidding firms? 3. Is there different abnormal return for both shareholders if we separate the abnormal returns for acquisition of more than 50% from acquisition of less than 50%? The research question 1 challenges assumptions and theories that have been used in the proposal. That is, it tests the validity and conformity of the assumptions and theoretical models that have been adopted for the study. To this regard, such assumption helps this proposal confirm that the study will poses a sound research question. In such connection, the question has been developed as it is able to examine what the proposal considers as the scope, scalability, size and sustainability of the research topic. The second question on the other hand serves specific role as far as the thesis statement is concerned. It has been structured to reflect argument as postulated by Mikkelson and Partch, (2011) and as such, it has been narrowed to address the specific area that fits within the research design in particular and research methodology in general. In addition, when mergers and acquisitions in UK firms are compared against shareholders returns, this question clearly establishes dependent variable (mergers and acquisitions in UK firms) and independent (shareholders returns) variables. In so doing, the dependent variable becomes the main focus of this proposal. On the other hand, this question brings the independent variable which is the causal factor that tends to influence the problem of the research. Also given the time, characteristics of the participants and resources available, the question is structured with respect to the variables which are actually critical to the model and feasibility of the investigation to be undertaken. 5.0. Methods of data collection Asquith and Kim (2006) define data analysis as a process of systematically searching and arranging interview transcript, field notes, data and other materials obtained from the field with the aim of increasing your understanding of them and enabling you to present them to others. After the fieldwork but before analysis, all the questionnaires will be adequately checked for data verification. This study opts for mixed data collection methodology as it enhances the reliability of the data collected and the conclusions or deductions made. In this study, three data collection procedures were employed: observation, interviews and questionnaires. According to Black (2001), the most common qualitative data collection instruments range from interviews, observations and document reviews to survey questionnaires. According to Mikkelson and Partch, (2011), there are four main methods of collecting data or information: participation in the setting, direct observation, in-depth interviews, and a review of documentary evidence. Due to the nature of data on mergers and acquisition, a mix of data collection instruments was applied due to the mixed approach to the study. 5.1. Questionnaire The data collection instrument will use a semi-structured questionnaire, which was issued to the respondents engaged in the study. In this case, there will be open-ended questions which will require respondents to formulate their own responses or answers. On the other hand, there will be closed-ended questions requiring respondent to select their answers from the different options provided. In both categories (closed and open-ended) the design of the questionnaire will consider the language diversities in UK. 5.2. Interviews According to Black (2001), interview guide is a list of questions or general topics that the interviewer wants to explore during each interview and questionnaire distribution process. In this study, a set of questions will be formulated to help facilitate conversation with the respondents. The interview will not be limited to these questions. Based on the responses provided by the interviewee, other questions will be included in order to ask for further information or clarification. The questions that will be incorporated into these interviews will largely be based on the key objectives of the study. Again, the interview questions will be intended to help the researcher answer the research questions by deciphering the respondents’ perception and awareness on effects of mergers and acquisition on shareholders returns among UK firms. 5.3. Observation The third data collection instrument that was employed during the study was observation. Observation is a type of qualitative research strategy that requires the researcher to become a participant in the context of the study, observing the participants and gathering information (Black (2001).  In this research, inclusion of observation will help the research in the following ways: In cases when the nature of the research question to be answered is focused on answering a how- or what-type question Unlike cyber-crime, cyber victimization is relatively unexplored therefore it will be essential in explaining the behavior of people in a particular setting 5.4. Method of Data Analysis According Ravenscraft (2000), data analysis is a mechanism for reducing and organising data to produce findings that require interpretation by the researcher. In addition, the approach to data analysis in this study followed the same approach as that adopted in collecting the data. To begin with, the data will be coded by segmenting and labelling the respondents and the texts in different categories. With regard to questionnaire data, the information obtained after thematic analysis of the qualitative data will be presented using visual aids such as tables, charts and graphs. In regard to the quantitative data gathered from the first set of questionnaires for the different groups, SPSS and descriptive statistics (means and frequencies) will be utilised in the analysis. Along with various references such as SPSS textbooks, a statistics expert will be consulted to ensure accurate entering of data and correct test usage and Pearson’s Correlation analysis are employed to decipher the relationship between cases of mergers and acquisition and returns on shareholders. 6.0. Research Design 6.1. Location of the Research According to Ravenscraft (2000), location of a research is the place or setting of the study. This is to mean that it is through such location that one can be able to describe in summary, the region or geographical area(s) where the study is conducted. The regard, significant features which have the bearing on the study are given considerations. For instance, in this particular case, a significant feature is the mergers and acquisition and in so understanding, the three data collection tools; questionnaire and interview questions and observation will be prepared UK firms that have undergone mergers and acquisition. A different approach on what constitute research location has been given by Ravenscraft (2000) who argues that a research locale is that region where there is highest number of target population and such population will attempt to answer research questions. Based on this argument, this study has identified United Kingdom firms as broader research locations however; the study will focus its attention on specific areas where there are target groups and such groups have been identified as UK firms that have undergone mergers and acquisition. These locales have been identified as regions where relevant data will be gathered or the entry to which the data on mergers and acquisition and returns on shareholders belong. 6.2. Research Philosophy This research critically investigates effects of mergers and acquisitions on shareholders returns. Therefore a research philosophy is embedded on the belief on how the data concerning mergers and acquisitions should be gathered, analysed and used. In such extent, the term epistemology (what has been ascertained to be true) as opposed to doxology (what is thought to be true) entails the myriad philosophies in this research. The purpose of the research questions and objectives in this case is to transform issues believed to be doxa to episteme. Going by the Western tradition of science, there are two major research philosophies that are going to guide this study (Ravenscraft, 2000). These are the positivist (termed as scientific in other books) and interpretivist (also termed as anti-positivist) (Ruback, 2012). 6.2.1. Positivism Relating the ideologies of Ruback (2012) about positivism and mergers and acquisitions, there is need for the manipulation of reality with variations in only a given independent variable as such will identify regularities in, and to form relationship between some of the constituents of the world as it exist socially. 6.2.2. Interpretivism What Lewis argues about is that the study of mergers and acquisitions among UK firms in their natural set up or locality is significant to the interpretivist philosophy, together with the appreciation that science cannot evade affecting those locality or phenomena they intend to study. 7.0. Ethical Consideration According to Ruback (2012), ethical consideration during qualitative research is very important in the sense that the data collected do not lose their reliability. The proposal will engage pre-programmed survey laptop for the visits in the institutions/companies. To this extent, the objectives and data collection adopted provides convections regarding what results may be stated as significant and the levels of margins of mistakes or error are accepted by the research. The second aspect of the intervention relates to relationship the research will have with the sample or the general population. This will actually not be just relationship with people in accordance to their institutions or code of behaviour but protocols and a given set of guidelines as dictated by the research. In this case, this proposal has proposed that information gathered from interviews, closed and open ended questionnaires will be stored as XML file and encrypted for confidentiality. The other aspect of ethical consideration that must be given due consideration is to inform participants on the nature and importance of the study. To this regard, the study will be explained to them, along with the consideration that their participation would be voluntary. Before commencing the study, consent forms will be signed by the relevant managers, workers in different firms and shareholders. The identity of all the respondents will be kept anonymous and, in cases where a name will be used in, it will be a pseudonym and not the real name of any of the respondents. Each participant engaged in this study will do so voluntarily and through free consent. Consequently, the responses will not be obtained through giving any compensation to the respondents. Before commencing the interview sessions, each respondent will be briefed on what the research involved. In regard to the questionnaires, the purpose of the study will be highlighted in an opening statement. 8.0. Time scale Activity/ Month February 14 2015 Later Later Later Later Later Proposal writing Presentation of proposal Correction and amendments Preparation of data collection instruments and collection of data Dissertation Presentation of dissertation report Reference Lists Asquith, P., and E. Kim, (2006)"The Impact Of Merger Bids on the Participating Firms' Security Holders", The Journal of Finance, vol. XXXVII, pp. 1209 - 1228. Black, F., (2001) "Capital Market Equilibrium with Restricted Borrowing", The Journal Of Business, 45, pp. 444 - 454. Bowman, R., (2010) "Understanding and Conducting Event Studies", Journal of Business Finance & Accounting 10, pp. 561 - 584. Mikkelson, W., and M. Partch, (2011) "The Decline of Takeovers and Disciplinary Managerial Tumover", Journal of Financial Economics 44, pp. 205 - 228. Mitchell, M., and J. Mulherin, (2010) "The Impact of Industry Shocks on Takeover and Restmcturing Activity", Journal of Financial Economics 41, pp. 193 - 229. Morck, R., A.Shleifer and R. Vishny, (2004)"Do Managerial Objectives Drive Bad Acquisitions ?", The Journal of Finance, vol XLV, no 1, pp. 31 - 48. Mueller, D., (2007) "A Theory of Conglomerate Mergers", Quarterly Journal of Economics, 83, pp. 643 - 659. Ran, P., and T. Vermaelen, (2012) "Glamour, Value and the Post-Acquisition Performance of Acquiring Firms", Journal of Financial Economics 49, pp. 223 - 253. Ravenscraft, D., (2000)"Australian Mergers and Takeovers : A Review of Recent Evidence", Economic Analysis & Policy, vol. 17, no. 2, pp. 221 - 238. Ravenscraft, D., and F. Scherer, (1997) "life After Takeover", The Journal of Industrial Economics, vol. XXXVI, no. 2, pp. 147 - 156. Ruback, R, (2012) "Assessing Competition In The Market For Corporate Acquisitions", Journal of Financial Economics 11, pp. 141 - 153. Ryngaert, M., and J.Netter, (2001)"Shareholder Wealth Effects of the 1986 Ohio Antitakeover Law Revisited: Its Real Effects", Journal of Law, Economics & Organisation 6, pp. 253 - 262. Scherer, F., (2001) "Corporate Takeovers : The Efficiency Arguments", Journal of Economic Perspectives, vol 2, no 1, Winter 1988, pp. 69 - 82. Schipper, K., and R. Thompson, (2004) "Evidence On The Capitalised Value of Merger Activity For Acquiring Firms", Journal of Financial Economics 11, pp.85- 119. Sebenius, J., (2002) "Case Study : Negotiating Cross-Border Acquisitions", Sloan Management Review, vol. 39, no.2. Winter pp. 27 - 41. Shleifer, A., and R. Vishny, (2009) "Value Maximisation and the Acquisition Process", Journal of Economic Perspectives, vol. 12, no. 1, pp. 7 - 20. Singh, R., (1998) "Takeover bidding with Toeholds : The Case of the Owner's Curve", Review of Financial Studies, Winter 1998, vol. 11, no. 4, pp. 679 - 704. Stillman, R., (2008) "Examining Antitmst Policy Towards Horizontal Mergers", Journal of Financial Economics 11, pp. 225 - 240. Sudarsanam, S., P. Holl and A. Salami, (1996)"Shareholder Wealth Gains in Mergers : Effect of Synergy and Ownership Stmcture", Journal of Business finance & Accounting, 23 (5) & (6), July 1996, pp. 673 - 698. Read More