The Impact of Mergers and Acquisitions on Enterprises Stock Price in Asian and European Countries - Literature review Example

The Impact of Mergers and Acquisitions:

Asian and European countries

Table of Contents

1.0 Introduction3

2.0 Literature Review3

2.1 Mergers and Acquisitions3

2.2 Mergers and Acquisitions in Asian countries4

2.3 Mergers and Acquisitions in European countries5

2.4 Impact of Mergers and Acquisitions on stock prices6

2.5 Evaluation of the impact on some selected Asian and European companies7

3.0 Conclusion13

• 1.0 Introduction

Mergers and acquisitions refer to the combination of two or more companies and their assets. Mergers and acquisitions can be employed by many firms as a result of management failure like losing competitive advantage and poor financial performance and it is also implemented as a necessity for financial support (Wallace and Moles, 2012). Many companies often get their strategies misaligned and it starts losing shareholders’ confidence. In those cases, merging with another successful company or acquiring a smaller company can assist in amending their strategies (Wallace and Moles, 2012).

There are various other reasons for a firm to indulge in mergers and acquisitions like diversifications, fast changing technology, rising competition, changing consumer trend, political and industrial pressures, etc (Sherman and Hart, 2005). The financing process of a merger can be several ways. Transactions may be through all cash, all securities or a combination of both. Securities transactions can be by the use of stock of the acquirer as well as other securities like debentures (Gaughan, 2007).

The main purpose of this research study is to understand the impact of mergers and acquisitions on the company stock prices of Asian and European countries. For this study the Asian and European countries were selected because the companies of these regions have involved in high amount of mergers and acquisitions deals with the developed countries of the world like the U.S.

• 2.0 Literature Review
  • 2.1 Mergers and Acquisitions

Merger is the combination of two or more companies to form a new company where the assets and liabilities of the selling company are absorbed by the buying company. On the other hand, acquisition is the purchase or complete takeover of one company and its assets by another company (Sherman and Hart, 2005, Gaughan, 2007). Mergers and acquisitions can prove to be the most effective way to expand into a new market, to start a new product line or to increase distribution (Sherman and Hart, 2005). According to Ma, Pagan and Chu (2009), the volume of mergers and acquisitions has greatly increased over the last few decades particularly in the developed markets. Once which was a U.S. business phenomenon, now M&A deals are commonly used by companies across the world to achieve their goals and objectives related to strategic growth. The legal system and the cultural differences between the developed countries and the Asian countries influences and differentiates the M&A procedure between both the region (Ma, Pagan and Chu, 2009).

According to Sherman and Hart (2005), merger can be the most efficient and effective way to enter a new market. Mergers and acquisitions nowadays are more strategically motivated than in the past. The financing behind the M&A deal is more sound and secure than ever before. Companies continue to use their stock as currencies by giving the seller potential upside in the combined entity. This motivates both the parties to work together on a post-closing basis to truly enhance shareholder value. In addition, third-party financing is more readily available. The number of financing sources has continued to grow giving market companies more access to capital than in the past (Sherman and Hart, 2005).

• • 2.2 Mergers and Acquisitions in Asian countries

The Asian companies are rewriting the rules on M&A. Small Asian companies are taking over large western companies. They are increasingly snapping up competitors across the border instead of their own domain (Chakravarty and Ghee, 2012). Although most of the M&A activities are initiated by companies of the developed countries, a recent study by A.T. Kearney on global M&A revealed that the paradigm is shifting (Kearney, 2008). It was found from the study that companies from developing countries like China, India, Russia, United Arab Emirates, Malaysia and South Africa have increasingly involved in M&A activities (Kearney, 2012; Kearney, 2008). In 2007, out of the major 2,168 acquisitions between the developing and developed countries, 20% of them that is a total of 421 acquisitions were initiated by companies from the developing countries (Kearney, 2012, Kearney, 2008). In Asia, companies from China, India and Malaysia accounted for almost 56% of the M&A deals that occurred from 2002 to 2007.

As companies from the Asian countries increasingly involves in equity investments in developed countries, their objectives align with the political goals of their governments. For example, the Chinese and Russian government are looking forward to enter the developed markets like the U.S through M&A activities and enjoy economic power (Kearney, 2008). According to Thomson Reuters report, in 2015 mergers and acquisitions in the Asian countries reached more than US $1 trillion. China witnessed the majority of M&A activities in 2015, where Chinese companies were targeted by both domestic and foreign firms accounting to US $607.4 billion worth of deals (South China Morning Post Publishers Ltd, 2016). According to data taken from TechInAsia, a total of 535 mergers and acquisitions have taken place in Asia since 2011, out of which India is leading by 219 deals (TechInAsia, 2016).

Figure 1: Asian companies’ Mergers and Acquisitions value (March 2014-June 2015)

(Source: Statista, 2016)

• • 2.3 Mergers and Acquisitions in European countries

In 2005, the value of M&A activities in the European countries reached an amount which was very close to that situation of the late 1990s, when the stock market boomed with M&A activities (Renneboog and Martynova, 2006). It is important to understand the reasons behind such M&A development and its potential consequences on the profitability and balance sheet effects of the European companies. European firms eagerly participated in M&A activities, the amount of which is similar to the M&A activities which is performed by the US and UK firms (Kearney, 2012). There is a significant growth of the European M&A market over the last few decades. In the beginning of the 1980s, European M&A activities were most negligible, which reached a level of 4,000 deals by the end of the fourth wave. Moreover, at the beginning of the fifth wave in 1993, Europe started with 7,000 M&A deals which reached more than double by 2000 (Renneboog and Martynova, 2006).

The M&A activities that took place in the 1980s were mainly due to the significant rise in the number of transatlantic deals where the US companies were mostly the acquirers and the European companies were the targets. In 1990s, an increase in intra-European transactions within the national borders proved to be the main reason for the M&A activities. In 2000s, the recent wave of the M&A activities are driven by the increasing economic and legal integration of the European countries (Renneboog and Martynova, 2006). This change in focus towards the intra-European M&A deals can be aligned to the development of the European market.

Figure 2: European companies’ Mergers and Acquisitions value (March 2014-June 2015)

(Source: Statista, 2016)

• • 2.4 Impact of Mergers and Acquisitions on stock prices

When two companies involve in a merger or an acquisition, both the company’s stock prices gets affected (Streetdirectory, 2016). In case of an acquisition, generally the acquiring firm’s share prices drops down whereas the acquired firm’s share price rises up (Learning Markets, LLC, 2016). This is mainly due to the reason that the acquiring firm has to pay an extra premium for the acquisition, so that the promoters of the target company accept the acquisition (XO Group Inc., 2016).

For example, if the target company was trading its share at $30 per share, the acquiring company has to pay more than $30 per share for the bought up company. This in turn reduces the net worth of the acquiring company (ISC Technologies, 2016). In addition, there is expected to be a lot of uncertainties relating to the acquisition. The employees of the acquiring firm will be afraid of losing their jobs which reduces their productiveness. Moreover, if the acquired firm has some debts, it will be an extra burden for the acquiring company and it will have to incur extra costs in restructuring the whole organisation (ISC Technologies, 2016). All these reasons tend to bring down the share prices of the acquiring firm. However, sometimes the stock price of the acquiring firm also increases after the announcement of the deal, if the investors assume that the deal is going to be successful or the target firm has brand value or reputation.

In case of mergers, the two companies generally make an agreement where one company in exchange for its own stock, purchases the other company’s stock from the shareholders. Although stock-for-stock is the most common form of merger agreement, in many cases cash or some other form of payment is also used to facilitate the transaction of the shares (Hearst Newspapers, LLC, 2016).

Stock market investments involve high amount of risk and the values of the shares depend on many factors like company’s financial performance, government policies, natural calamities and many other factors one of which is Merger and acquisition (ISC Technologies, 2016). When an acquisition is announced, the shareholders of the target firm receive huge premiums, approximately 10% to 30% more comparing to the pre-announcement share price (Learning Markets, LLC, 2016).

• • 2.5 Evaluation of the impact on some selected Asian and European companies

In the above sections we have studied the emerging trend of M&A activities in the Asian and European countries and the impact of these M&A activities on the stock prices of the companies. Now we will evaluate and understand the impact of M&A activities on the stock prices of some selected Asian and European companies. These companies are selected on the basis of their popularity and the volume of deal. With the study on these companies, we will evaluate how the M&A deals affect the stock prices of the acquirer firm and the target firm, before and after the deal takes place.

Figure 3: Tata Steel Stock prices before and after it acquired Corus

(Source: Yahoo Finance, 2016a)

Tata Steel, one of the biggest Indian steel company acquired Corus, Europe’s second largest steel company in 2007. With the acquisition for the price of $12.02 billion, Tata Steel became the fifth-largest steel producing firm in the world (Ipleaders, 2016). Tata Steel’s main intention for the acquisition was to explore the European markets and gain synergies in manufacturing, logistics, procurement and R&D (Ipleaders, 2016).

Before the acquisition, Corus was a much bigger firm than Tata Steel. In 2006, Tata Steel had an operating profit of $840 million, comparing to that Corus’s operating profit was $860 million (Ximb, 2008). After the final bidding, Corus’s stock price increased by 70% comparing to its price before the bidding. Tata had to pay a total of 608 pence per share for the acquisition amounting to US $12 billion, which was paid in cash (Ximb, 2008). This signifies a very high premium of 49% paid by Tata over the actual market share price of Corus as on 2006. Moreover, as the deal was through cash, the total cash flow for Tata Steel amounted to 1.84 billion pounds (Ximb, 2008). After the announcement, Tata Steel’s share price dropped by 10.7 % on the Bombay stock market (Ximb, 2008). However, after the takeover was complete, by the end of 2007, Tata Steel’s stock prices started to rise gradually.

Figure 4: ING Vysya Bank Stock prices before its merger with Kotak Mahindra Bank

(Source: Yahoo Finance, 2016b)

Figure 5: Kotak Mahindra Bank Stock prices before its merger with ING Vysya Bank

(Source: Yahoo Finance, 2016c)

Figure 6: Kotak Mahindra Bank Stock prices after the merger

(Source: Yahoo Finance, 2016c)

In April 2015, two Indian banks Kotak Mahindra and ING Vysya decided to merge and all the branches of the merged company agreed to function as Kotak Mahindra (Business Standard, 2015). The merger made Kotak Mahindra the fourth largest private bank in India as on December 2014, with a total business of Rs. 2.25 lakh crore (Business Standard, 2015). The merger was a stock-for-stock deal which was worth Rs. 148.51 billion (US$ 2.4 billion). For every one stock of ING Vysya, its shareholders received 0.725 shares of Kotak Mahindra. This means every shares of Kotak Mahindra is worth approximately 1.4 shares of ING Vysya (IBS Center for Management Research, 2015).

Currently, after the merger, the share price of Kotak Mahindra trades at around 3.6 times its expected book value for the current fiscal year (Business Standard, 2015). After the merger was announced, both the firm’s stock prices started to rise gradually. However, after the merger, Kotak’s stock prices started to fluctuate where its price reached a peak of Rs. 740 per share in July 2015 and it again dropped down to Rs. 600 in September 2015 (Source: Yahoo Finance, 2016c).

Figure 7: Stock Prices of B.G. Group Plc. before and after it got acquired by Royal Dutch Shell

(Source: Yahoo Finance, 2016d)

Figure 8: Stock prices of Royal Dutch Shell before and after it acquired B.G. Group

(Source: Yahoo Finance, 2016e)

BG Group Plc., a British MNC got acquired by Royal Dutch Shell, an Anglo-Dutch MNC, in February 2016. It was a $70 billion acquisition deal. The deal was a combination of both cash and stock, which valued BG Group at $20 per share (Bidness, 2015). Royal Dutch agreed to pay a premium of 50% for the acquisition (Bidness, 2015).

Since the acquisition was announced in April 2015, the stock prices of Royal Dutch started to drop drastically reaching GBP 1300 per share in February 2016, during the acquisition (Yahoo Finance, 2016e). However, the price is again increasing gradually. For BG Group, after the acquisition was announced, in April 2015, its price suddenly increased and reached GBP 1200 per share, which was GBP 800 per share before the announcement (Yahoo Finance, 2016d). This is due to the reason that Royal Dutch had to pay a high premium for the acquisition which reduced its stock price and BG Group’s shares were valued $20 per share more than it was valued earlier (Bidness, 2015).

Figure 9: Stock prices of SABMiller Plc. before and after it merged with Anheuser-Busch InBev

(Source: Yahoo Finance, 2016f)

Figure 10: Stock prices of Anheuser-Busch InBev before and after it merged with SABMiller Plc.

(Source: Yahoo Finance, 2016g)

In October 2015, Anheuser-Busch InBev, a Belgian-Brazilian multinational company operating in beverage and brewing announced its plan to takeover SABMiller, the 2nd largest brewer MNC for GBP 69 billion ($104 billion) (The New York Times Company, 2016). Soon after the merger was announced, SABMiller’s share price increased by 8.5% and AB InBev’s share price increased by 1.8% (MarketWatch, Inc., 2015). AB InBev offered SABMiller a share price of $67.62 per share (MarketWatch, Inc., 2015). The combined value of the two beverage companies will amount to around $275 billion. AB InBev dominates 39.9% of the global beverage and brewing industry and SABMiller enjoys 17.9% of the industry profit (Business Insider, 2015). Hence, the merger will create the world’s largest beverage and brewing company.

• 3.0 Conclusion

Mergers and Acquisitions can prove to be the best strategy for many firms to compete and sustain in the present environment of uncertainty. While many companies indulge in M&A activities for expanding their business and markets, many other companies gets into M&A deals for mere survival. M&A activities are taking place very often in every country and in every sector. Previously, it was the companies of the developed countries that had the capacity to merge or acquire a firm, but with globalisation and removal of the trade barriers, now the companies of the developing countries are also involving in M&A activities. The Asian and European companies have aggressively involved in M&A activities since the last few decades, which have drastically changed the global business structure.

M&A activities affect the involving firm’s business aspects which also includes their stock prices. It is studied from this research work that from the date of the announcement of the merger or acquisition plan, stock prices of both the companies starts reacting. From the historical examples of some top M&A activities in certain Asian and European companies, it is studied how the M&A deals can affect the organisational structure and the stock prices of the companies. It is estimated that the level of mergers and acquisitions in the Asian and European countries will increase in the upcoming years, which can change the entire business scenario of the world.

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