EVALUATION OF VALUE OF THE FIRM - A CASE STUDIES OF IDEA MERGERTHE VODEFONE

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1 EVALUATION OF VALUE OF THE FIRM A CASE STUDIES OF IDEA MERGERTHE VODEFONE Arpitha N 1, Dr. Manoj Kumara N V 1 Research Student, Department of Management Sciences, Maharaja Institute of TechnologyMysore. Associate Professor, Department of Management Sciences, Maharaja Institute of TechnologyMysore. Abstract Merger and acquisition have been common phenomenon in recent times. Companies have been actively involved in merger and acquisitions domestically as well as internationally. The increased competition in the global market has promoted the companies to go global for merger and acquisition. Secondary data were extracted from audited annual reports and financial statements of companies for a time span of five years (013017). Data were sorted, cleaned and coded first and then this data entered. Index Terms Free Cash Flow, Descriptive Analysis, T Test I. INTRODUCTION Till the year 19, concept of Merger and Acquisition in India was not much popular. During that period a very small percentage of businesses in the country used to come together mostly into a friendly acquisition with a negotiated deal. Merger and acquisition are a key part of a corporate growth strategy. The movement of merger and acquisition in India has changed over the years. To study the concept of Merger/Acquisition in detail by taking examples of some companies. The objective is to find out the major issues associated with pre and post merging situations with special emphasis on the human aspect. Merger/Acquisition is a phenomenon which is easy to think but hard to implement. Three phases of mergers pre merger, transition phase and the postmerger phase have its own advantages as well as difficulties, if handled with proper care synergies can be withdrawn but a little mistake can spoil the whole transition. Companies are acquiring more and more firms in order to expand their business and with lots of reasons which are discussed here. If any company is not adopting this way either they will not grow or will be acquired by the other major big firm. Although the present system which is adopted by the companies for takeover can't be taken as the appropriate one because the major reason behind this is of synergies but still more and more companies are merging with one another as there is a flow of merger or acquisition in the present era. When companies merge or make a plan for acquisition the only factor in their mind is growth or expansion or synergies. People factor is totally ignored. Either they are not involved anywhere or if involved then at very lower level. Mergers and acquisitions (M&A) is the area of corporate finances, management and strategy dealing with purchasing and/or joining with other companies. In a merger, two organizations join forces to become a new business, usually with a new name. Because the companies involved are typically of similar size and stature, the term "merger of equals" is sometimes used in an acquisition, on the other hand, one business buys a second and generally smaller company which may be absorbed into the parent organization or run as a subsidiary. A company under consideration by another organization for a merger or acquisition is sometimes referred to as the target. II. BACKGROUND OF THE STUDY Idea Cellular started its journey in 199 as Birla Communications Limited with GSM licenses in Gujarat and Maharashtra circles. In 1996 it changed name to Birla AT&T Communications Limited following joint venture between Grasim Industries and AT&T Corporation. In 001 it changed name to Birla Tata AT&T as a joint venture between Aditya Birla group, Tata Group and AT&T Wireless. The company named its brand Idea in 00. Following AT&T Wireless' merger with Cingular Wireless in 004, Cingular decided to sell its 3.9% stake in Idea. This stake was bought by the remaining two stakeholders equally. [] Tata forayed into the cellular market with its own subsidiary, Tata indicium acdma based mobile provider and in April 006, aditya IJIRT 1461 INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH IN TECHNOLOGY 13

2 Birla group announced the acquisition of the 4.1% stake held by Tata Group at INR 40.1 a share amounting to INR billion with 1% of the stake acquired by Aditya Birla Novo and the remaining by Birla TMT holdings Private Ltd. Both AV BIRLA family owned companies. Malaysia based axitha bought a 19.96% of the stake acquired by Aditya Birla Novo and the remaining by Birla TMT holdings Private Ltd. Both AV BIRLA family owned companies. Malaysia based bought a 19.96% stake in the company in 009. III. REVIEW OF LITERATURE Cartwright & cooper (1993) reinforced the previous financial and financial and other strategic benefits expected from mergers and acquisitions are undermined by the cultural conflicts. Carleton (1997) Research studies reported that more than two thirds of large merger and acquis ion deals fails to create value for shareholders An acquisition relates to the transfer of ownership between two firms, where one firms (the acquirer) buys a part. Nonprofitability investment of such transaction themselves Swami Prasad (007) identifies that the success of a merger between two or more companies depends as much on cultural fit as it does on strategic fit and financial fit and the proper management of change and employee response thereto. M&As have been studied in strategic management under diverse lenses. The postacquisitions integration of the acquired firms has warranted special research attention Zollo and Singh,( 004) The M&As may be opportunities for the firms to reconfigure their businesses, altering their pool of resources and capabilities. Hansen and Nohira (004) Merger and acquisitions have become a global phenomenon and a popular strategic choice for company growth and expansion. Richardson (006) defined free cash flow (FCF) as the net cash the firm earns from operating activities after making deduction from development costs; this cost is then added to R&D expenditure and finally investment expenditures of new projects are deducted from that. Pradeep Kumar Gupta(01) states that Merger and Acquisition has become a strategic concept to grow quickly for a number of leading companies worldwide. Neha Sharma( 014)This paper examines that the impact of merger and acquisition on the performance of Indian telecom industry they reaches the demographics growth opportunities keep India an attractive destination merger and acquisition. IV. OBJECTIVE OF THE STUDY To ascertain the change of the firm using market capitalization in part acquisition risk. V. RESEARCH METHOLOGY Type of Research This study is considered by Descriptive Research design because of the mergers and acquisition is existing nature problems faced by companies and it s descriptive in nature. Acq uirer IDE A Acquir ed VODE FONE Sources of Data Sample Design Type Deal of value the activi ty MER GER Cash paym$ 10.7 (400 0crore ) Year of occur rence On0 march 01 Strat egic moti ve Idea selec ted this optio n and to expa nd the busin ess and high er profi t. To get a large no of custo mer IJIRT 1461 INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH IN TECHNOLOGY 136

3 The research has been based on secondary data analysis. Secondary data: It is the data which is already present in the secondary form like press, Magazine, news, paper, journals and internet. Source of secondary data Annual report of the company. Academic books. Company website. Tools for the study: Statistical Tools: Descriptive statistics: In this study using of the statistical tools for to identifying the companies mean, median standard, Deviation kurtosis and skewness. Mean: mean refers to the mean or average that is used to derive the central tendency of the data in questions. Standard deviation: standard deviation is a numerical value used indicate how widely individuals in a group vary. Kurtosis: it is the degree of peakedness of a distribution Skewness: skewness in statistics represents an imbalance and asymmetry from the mean of a data distribution T Test: it is the statistical hypothesis test in which the test statistic follows a student s tdistribution under the null hypothesis Hypothesis of the Study There is no significant change in value of the firm postacquisition. VI. DATA ANALYSIS AND INTERPRETATION In this study considers five years of ratios as a secondary data analysis. Ratios use as financial tools and mean, standard deviation, kurtosis, skewness, and Ttest as a statistical tool Table 6.1 Calculation of value of the firm under post acquisition particulars EBIT INTEREST E Ke=EPS/M P Kd=Interes t/debt B=F/Kd S=E/Ke V=S+B 7.0 Ko=Kd(B/ V)+Ke(s/v) The above table the ratios of five years (from 013 to 017) is showing. The EBIT of the firm is showing decreased from the year 013 to 017. Interest of the firm is also increasing year after year. The earning of the firm before deducting the tax and after reducing interest is also decreased from 013 to 017. Cost of equity of the firm is negative in 013 but further years it has been increased and positively reacted. On the other hand cost of debt has been increased so it is not favorable for the firm. Cost of capital is showing increased from year after year. Table 6.significant impact of value of the firm in postacquisition Ye ars S B V Ke Kd Ko IJIRT 1461 INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH IN TECHNOLOGY 137

4 In the above table the cost of equity (Ke) has been increased from 013(4.369) to 017(19.00). Cost of debt of the firm has been decreased from 7.731(013) to 9(017). It is a positive impact for the firm as the cost of debt increased, it will be favorable for the firm. The cost of capital of the firm is showing increased, so it is also favorable for the firm. Table 6.3 Descriptive statastical Statisti S B V Ke Kd Ko cal Mean Media n Standa rd Deviat ion Kurtos is Skewn ess Minim um Maxi mum The above table depicts the descriptive research of the firm. In this the cost of equity(ke) is having mean value of 6..1, wherein the cost of debt is showing the mean value of 0.9 and the cost of capital shows mean of 9.. The median for Ke is 3.0, Kd= 7.44, Ko=.. The kurtosis for cost of equity is 4.16, for cost of debt is showing 4.3, for cost of capital it is There is a positive skewness for Ke, Kd and Ko. Table 6.4significant impact of value of the firm in postacquisition Ye S B V Ke Kd Ko ars Table no 6.OneSample Test S B Test Value = 0 T Df Sig. ( tailed) Mean Diffe rence % Confidence Interval of the Difference Low er Upp er V K IJIRT 1461 INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH IN TECHNOLOGY 13

5 e K d K o The above table depict the one sample test of the firm. In this the cost of equity (ke)is having the mean value of 1.0, where in the cost of debt is showing the mean value of the cost of capital shows mean of.14. all the significant value is less than 0.0 i.e., cost of equity 0.13, cost of debt is 0.11 and cost of capital is 0.09 so (H0)is proven that is There is no significant value of firm in post merger VII. FINIDING SUGGESTION In 013 where as cost of equity is 4.36 in 017 it increases to In 013 where as cost of debt is 7.73 in 017 it decreased to 4.79 In.13 where cost of capital is 16.4 in 017 it increased to 4.96 The acquiring company idea have always the targeted company s Vodafone financial statement VIII. CONCLUSION Comparing the results occurred in the above three tables the following findings has been derived, Issue of merger and acquisition has been a major strategy employed by firms. Many firms resolve to merger or acquisition with the expectation of achieving increase in shareholders wealth or market capitalization, leverage buyout, increase in performance etc. Merger and acquisition, as trend in business environment would enhance profitability, shareholders wealth, leverage buyout and as well could increase company s overall performance. Although there is enough literature on merger and acquisition announcement effect on stock prices and profitability of companies, most of the studies have been done for the developed countries especially UK and US. In, India very few researches have been done on this topic. Some studies conducted in India context have explored the impact of merger and acquisitions on financial position of firms. The current study makes an attempt to explore the merger and acquisition announcement impact on shareholders wealth and firms profitability and aim to investigate the performance of value of firm in postacquisition by taking two companies as sample. Mergers and acquisitions are being used as an important strategic tool for survival by many organizations in today s competitive business environment. The essence of mergers and acquisitions is that the value of two companies together is greater than one. Companies merge with or acquire other companies to make use of one another s strengths and these results in increased market shares and profitability that are vital for survival. Mergers and acquisitions enable companies to work as one and thus increase their total market value. REFERENCES [1] Maheshwari, S. (00). Principles of Management Accounting. New Delhi: Sulthan Chand & Sons. [] Richardson, S. (006). Overinvestment of free cash flow. Review of accounting studies, 11(3), [3] Griffith, J.M., & Caroll, C.(001). Free Cash Flow, Leverage and Investment Opportunities. Journal of Business and Economics 1(), 1. [4] Ghugham (00), Innovative Journal of Business and Management (01), ISSN no , pp no [] Appelbaum, 007. Mergers 101(part Two): training managers foe culture, stress, and change challenges. Industrial and Commercial Training 39(4), [6] Sadaf Ambreen (016), Impact of Free Cash Flow on profitability, ISSN , Page no1131. [7] Dimitrios Maditinos, The effect of merger and Acquisions on the performance of Companies (Journal on European Research Studies), vol 1, Issue, pp , ISSN: [] Ghosh, A; Does Operating Performance Really Improve Following Corporate Acquisions, Journal of corporate Finance 7, pp1117, 001. IJIRT 1461 INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH IN TECHNOLOGY 139

6 [9] Pradeep Kumar Gupta, Innovative Journal of Business and Management (01), ISSN no , pp no [10] Wang J, 007, Motives and effects of mergers and Acquis ion ISSN No197. [11] Roll, R 196, The Hubris Hypothesis of Corporate T akeovers, Journal of Business, Vol.9(),pp IJIRT 1461 INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH IN TECHNOLOGY 140