Chapter Four EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS AND CQUISITIONS ON ACQUIRER FIRMS IN INDIA

Transcription

1 Chapter Four EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS AND CQUISITIONS ON ACQUIRER FIRMS IN INDIA

2 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 110 CHAPTER FOUR EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS AND ACQUISITIONS ON ACQUIRER FIRMS IN INDIA Several studies have examined the wealth effects of mergers and acquisitions by evaluating the announcement period returns in shares of acquirer companies during the period surrounding announcement of deals [see for instance, Eckbo (1983), Asquith (1983), Malatesta (1983), Rieck (2002), Mishra and Goel (2005)]. Assuming the theory of efficient markets operates, the trading in shares of acquirer firms should ideally take place around announcement date of merger with expectations and future implications of merger transactions on acquirer firms operating and financial performance. If that is the case the positive expectations should ideally increase the prices of shares and bring about significant positive gains to shareholders in acquirer firms and vice-versa. In this chapter we examine the announcement period abnormal returns to shareholders in acquirer firms using event study methodology outlined in chapter two. The results are discussed for each of the sectors viz., manufacturing sector as a whole, chemicals sector, textile sector, drugs and pharmaceuticals sector, food and beverage sector and financial services sector. 4.1 Empirical Results on Announcement Returns The cumulative abnormal returns are computed for acquirers for preannouncement period, post-announcement period and around announcement period. The results are prepared and presented only for those acquirer

3 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 111 companies for which the announcement dates are available and also the share price data for full 40 days surrounding the announcement date as well as 180 days before the 20 days prior to announcement date. This will facilitate accurate computations of cumulative abnormal returns for acquirer firms as per methodology outlined in chapter two. The results are discussed in section I and II below separately for acquirers in manufacturing sector and those in financial services respectively. 4.2 Cumulative Abnormal Return of Acquirers in Manufacturing Sector Table 4.1 presents the results of event study methodology of cumulative abnormal returns (CAR) for acquirers in manufacturing sector. Table 4.1: Percentage Cumulative Abnormal Returns of Sample Acquirer Firms in Manufacturing Sector in India Acquirer Chemical Sector Pre-Announcement Post-Announcement (t-20) (t-10) (t-5) (t+5) (t+10) (t+20) (t- 20,t+20) Around Announcement (t- 10,t+10) (t-5,t+5) Bayer India Ltd Futura Polyesters Kissan Mouldings Ltd Berger Paints Beck India Sree Rayalaseema Hi - Strength Hypo Ltd Castro! India Dharamsi Morarji Chemicals Ltd BASF Arvind International Exide Industries Average CAR t Statistics **

4 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 112 Acquirer Textile Sector Pre-Announcement Post-Announcement (t-20) (t-10) (t-5) (t+5) (t+10) (t+20) (t- 20,t+20) Around Announcement (t- 10,t+10) (t-5,t+5) Ashima Centuryenka Easternsilk Nahar Ind Nahar Exp Sangam Spentex Welspun Zodiac Average CAR t Statistics *** Drugs & Pharmaceutical Sector *** *** Aurobindo Cadila Cyanamid Dr Reddy Lupin Nicholas Novartis Ranbaxy Strides Wyeth Average CAR t Statistics Food & Beverage Sector Balrampur Chini Eveready (1997) Eveready (2003) Rajshree Sugar SICAL Simbhouli Average CAR t-statistic * All Manufacturing * Average CAR t-statistic ** * Note: (i) 1' refers to announcement date, (t-n) means n days before announcement date, (t+n) means n days after announcement date. *, **, *** represents significance at 10%, 5% and 1% level respectively *

5 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 113 Following important observations can be made from Table 4.1 with respect to each of the sectors under study: (a) Manufacturing sector The movement in average cumulative abnormal returns of acquirers during various periods surrounding the announcement period are depicted graphically in Fig.4.1. (i) The average Cumulative Abnormal Returns for acquirers in Manufacturing Sector have been positive during the study period. The average CAR values are found to be statistically significant at 5% level for period (t-5) i.e. during 5 days before the announcement of merger event. Similarly, the announcement period returns are 5.28% for 20 Days around announcement and statistically significant at 10% level. Also for period of 10 days around announcement of merger, the average cumulative abnormal returns of firms is 4.13% and again statistically significant at 10% level. Fig.4.1: Average Cumulative Abnormal Returns for Acquirers in Manufacturing Sector Average CAR ( (-20,0) (-10,0) (-5,0) (0,5) (0,10) (0,20)

6 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 114 (ii) When we divide the total period into pre-announcement and postannouncement, it can be observed that the average CAR is highest during pre-announcement period and fall sharply during the post,41 announcement period. The highest magnitude of announcement period cumulative abnormal returns of acquirers in Manufacturing Sector (7.11%) accrue during 40 days around the announcement date i.e. (t-20, t+20) event window. However, these returns are not statistically different from zero. (iii) Interestingly, shorter the period taken around announcement of merger, lesser is the cumulative abnormal returns for the shareholder indicating lowering of investor expectation from merger as the information on possible merger benefits is processed by the market participants. (iv) More than 60% of observations of CARs of acquirers in Manufacturing Sector are positive during pre-announcement period. However, during post announcement period the percentage of positive CARs dropped to 53.70%. (b) Chemicals Sector The movement in average cumulative abnormal returns of acquirers in chemicals sector during various periods surrounding the announcement period are depicted graphically in Fig.4.2.

7 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 115 Fig.4.2: Average Cumulative Abnormal Returns for Acquirers in Chemicals Sector Average CAR (i) The analysis of announcement period returns for acquirers in chemicals sector indicate that Average CARs are substantially lower during pre-announcement period for acquirers while the same increases during post-announcement period. Average CAR for acquirers in Chemical Sector are -6.14% during (t-20) window which is however, not statistically significant. On the other hand average CAR is 5.14% during (t+20) window which again though is not statistically different from zero. However, average CAR for period of 10 days after announcement (7.86%) is found to be statistically significant at 5% level. (ii) Out of all the observations of CAR for acquirers in chemicals sector across various event windows, 46.46% of the observations are found to be negative. Thus marginally higher percentage of observations (53.54%) are indicating positive CARs. Though.

8 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 116 statistical significance could not be established for average CARs for acquirets in chemical sector, the indication of high number of positive CAR in all the observations for the sector provides a weak evidence of positive short term gains to shareholders in this sector. (c) Textile Sector The movement in average cumulative abnormal returns of acquirers in chemicals sector during various periods surrounding the announcement period are depicted graphically in Fig.4.3. (i) For Textile Sector, the average CARs are positive and higher for period from (t-20) to (t+5) after which it drops significantly. The average CAR is 7.16% for period of 10 days before the announcement date which is also found to be statistically significant at 1% level. Similarly, the average CAR is 9.80% and statistically significant at 1% level. The positive and statistically significant average CAR during pre announcement date is indicative of positive expectations of investors from the probable merger. The acquirers in Textile sector being concentrating on improving operational efficiency, the market expects the benefits to accrue from mergers. Besides, the industry is highly fragmented with too many small players and mergers are expected to create bigger size organizations able to compete with foreign players who have become major threat to domestic firms particularly after lifting

9 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 117 of quotas in the sector in The significant positive returns during pre-announcement period are probably indicative of positive expectations of the investors against such threats for acquirers in textile sector. Fig.4.3: Average Cumulative Abnormal Returns for Acquirers in Textile Sector Average CAR (-20,0) (-10,0) (-5,0) (0,5) (0,10) (0,20) (ii) The average CAR is also positive and 9.21% for period of 10 days around announcement period and is statistically significant at 1% level. For, overall period of 40 days around announcement period, the average CAR though positive and 7.71%, it is not statistically different from zero. (iii) Out of all the observation of CAR for acquirers in textile sector, only 32.10% are found to be negative across various event windows.

10 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 118 (d) Drugs and Pharmaceuticals Sector The movement in average cumulative abnormal returns of acquirers in drugs and pharmaceuticals sector during various periods surrounding the announcement period are depicted graphically in Fig.4.4. Fig.4.4: Average Cumulative Abnormal Returns for Acquirers in Drugs and Pharmaceuticals Sector Average CAR 0.00 (-20,0) (-10,0) (-5,0) (0,5) (0,10) ( (i) For pharmaceuticals Sector, the average CAR is highest (4.50%) for (t-20) window, though it falls sharply during other event windows of pre-announcement period as well as post announcement period with lowest average CAR being -0.81% for (t+20) window. Again here, it is observed that the average CARs are lower during the period that is closer to the announcement date of mergers and acquisitions. However, none of the returns are statistically significant.

11 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 119 (ii) Out of all the observations of CAR, 46.67% of the observations across various event windows and acquirer firms are found to be negative. 7 out of 10 acquirers reported negative CAR for period of 5 days post announcement indicating that the immediate reaction of the market to the merger announcement had been negative for these acquirers. This is also supported by the evidence from Fig.4.4 which shows that the average CAR has decline to -0.81% for t-20 window although not statistically significant. (e) Food and Beverage Sector The movement in average cumulative abnormal returns of acquirers in drugs and pharmaceuticals sector during various periods surrounding the announcement period are depicted graphically in Fig.4.5. Fig.4.5: Average Cumulative Abnormal Returns for Acquirers in Food and Beverage Sector Average CAR

12 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 120 (i) The shareholders of acquirer firms in Food and Beverage Sector see a substantial drop in average CAR during post announcement period from statistically significant 21.09% for (t-20) window to statistically insignificant 2.98% for (t+20) window. Average CARs have higher magnitude for longer period around merger announcement date in this sector. [20.76% for (t-20,t+20) window]. Average CAR is 11.50% for 10 days surrounding the announcement date which is also statistically significant at 10% level. On the other hand for much closer event window (t-5, t+5) the average CAR is 1.98% and is statistically insignificant. (ii) Out of all the observations of CAR for acquirers across various event windows, 40.74% are negative while 59.26% are positive. During 20 days before announcement period, out of 6 cases, only one acquirer has experienced negative CAR. The number of acquirers having negative CAR has increased as the announcement date has neared. 4.3 Cumulative Abnormal Return of Acquirers in Financial Services Sector Table 4.1 presents the results of event study methodology of cumulative abnormal returns (CAR) for acquirers in manufacturing sector. Besides the movement in average cumulative abnormal returns of acquirers in drugs and pharmaceuticals sector during various periods surrounding the announcement period are depicted graphically in Fig.4.6.

13 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 121 (I) In case of acquirers in Financial Services Sector, it is observed that average CAR is -7.41% for (t-10) window. However, it improves substantially for event windows closer to announcement date and particularly for (t+20) post announcement period, the average CAR is 9.13% which is also statistically significant at 10% level. Table 4.2: Percentage Cumulative Abnormal Returns of Sample Acquirer Firms in Financial Services Sector in India Acquirer Pre-Announcement Post-Announcement Around Announcement (t-20) (t-10) (t-5) (t+5) (t+10) (t+20) (t- 20,t+20) 103+1(0t; (t-5,t+5) BOR Corp Bank Eicher IDBI JM Financial Khandwala Securities Kinetic Fincorp Magma Srachi PNB Vijaya Bank Walchand Peoplefirst Average CAR t statistic o e: 't' refers to announcement date, (t-n) means n days before announcement date, (t+n) means n days after announcement date. (ii) *, **, *** represents significance at 10%, 5% and 1% level respectively

14 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 122 Fig.4.6: Average Cumulative Abnormal Returns for Acquirers in Food and Beverage Sector Average CAR ;0) ) {-0710)---(072-0) (ii) Comparatively, there are more negative observations of average CAR in financial services sector as compared to those in manufacturing sector. The average CAR was -6.64% for 20 days prior to announcement date. Similarly, it was -7.41% for 10 days prior to announcement date and continued to remain in negative range until 10 days post-announcement date. None of these return observations are though, statistically significant. However, the direction of change observed in average CAR during preannouncement period indicates that investors are sceptical about the benefits accruing to acquirers out of merger transaction. In fact the observations of returns for 20 days around announcement (-10, +10) and 10 days around announcement (-5, +5) also are both negative (-9.15% and -5.48% respectively) though not statistically significant. The market perception, however, seems to have

15 EMPIRICAL ANALYSIS OF ANNOUNCEMENT EFFECT OF MERGERS 123 changed post announcement and the average CAR of 9.13% for t+20 window is found to be statistically significant at 10%. (iii) Out of all the observations of CAR, 49.07% are found to be negative while are positive. The analysis of cumulative abnormal returns for various sectors thus provides weak evidence of positive returns and at times statistically significant positive CARs for some event windows.