M&A ANNOUNCEMENT AND SHAREHOLDER S WEALTH: TARGET COMPANY

CHAPTER 5 M&A ANNOUNCEMENT AND SHAREHOLDER S WEALTH: TARGET COMPANY While an acquiring company is expected to create value through synergies when it acquires a target company, the shareholders of target-company can be lured to sell their shares if acquirer offers a substantial premium on their shares. This premium should be immediately reflected in the change in the share price of target-company. This chapter makes an attempt to examine the impact of M&A announcement on stock returns and other stock characteristics of the target companies included in the sample. This chapter has been divided into three sections. Section I focuses on the individual as well as aggregate analysis of the impact on stock returns for the target companies. It also examines relationship between abnormal returns during the pre-announcement period and post announcement period. Section II is devoted to analysis of the impact on other stock characteristics such as stock return volatility and trading liquidity of the shares of target companies. Section III focuses on the analysis of abnormal returns during various time windows with the objective of identifying opportunities for building profitable trading strategies. Section I M&A Announcement and Stock Returns This section examines the impact of M&A announcement on stock returns for the target companies. It is devoted to examination of the impact on M&A announcement on stock returns for the target companies both during the pre-announcement period and postannouncement period. 5.1. M&A Announcement and Stock Returns for Target Companies: Post- Announcement Period The impact of M&A announcement on stock returns was examined for the 21 days period (0 day to +20 days). The cumulative abnormal returns (CARj) along with the t- statistic for each target company for the post announcement period are given in Table 5.1. 119

Chapter 4 M&A Announcement and Shareholder s Wealth: Acquirer Company Table 4.6 Average Abnormal Returns During Post-Announcement Period: Acquirer Companies Window Day #AAR CAAR SE_CAAR t-statistic (0,0) 0.011288 _ (0,1) -0.002949 0.00834 (0,2) -0.001289 0.00705 (0,3) -0.001239 0.00581 (0,4) 0.000736 0.00655 (0,5) -0.007144-0.00060 0.00533-0.11186 (0,6) 0.000759 0.00016 0.00527 0.03090 (0,7) -0.003193-0.00303 0.00507-0.59833 (0,8) 0.005999 0.00297 0.00497 0.59741 (0,9) 0.002492 0.00546 0.00498 1.09710 (0,10) 0.004623 0.01008* 0.00503 2.00567 (0,11) -0.000195 0.00989* 0.00500 1.97900 (0,12) -0.000055 0.00983* 0.00498 1.97358 (0,13) -0.000620 0.00921 0.00500 1.84220 (0,14) -0.005381 0.00383 0.00492 0.77956 (0,15) -0.001564 0.00227 0.00487 0.46536 (0,16) -0.001588 0.00068 0.00479 0.14210 (0,17) -0.004615-0.00394 0.00472-0.83321 (0,18) 0.000876-0.00306 0.00472-0.64875 (0,19) 0.003276 0.00022 0.00472 0.04581 (0,20) -0.005916-0.00570 0.00478-1.19234 (11,20) _ -0.01578* 0.00450-3.50658 Note: The SE_CAAR and t-statistic have not been computed for the first five windows due very small number of observations (days) in these windows. *Values are significant at 5% level of significance #AAR relates to the last day in the window Moreover, significant cumulative average abnormal returns are not necessarily clustering in the narrow windows close to the date of announcement and may occur at later dates but the interest of the investor in these shares starts fading away after 10 days of M&A announcement. It may also be noted that the CAAR for the window (11, 20 day) was negative and statistically significant. This implies that after the 10 days, the CAAR is negative and significant and positive returns are primarily in the first 10 days of announcement. 111

Chapter 4 M&A Announcement and Shareholder s Wealth: Acquirer Company 4.6.2. CAAR During the Pre-Announcement Period An analysis of the behavior of AAR and CAAR during the pre-announcement period was examined during 19 windows, each window being bigger than the previous by a day. Table 4.7 presents cumulative daily average abnormal returns and the t values for various time windows in the pre announcement period of 20 days (day -1 to day -20). In addition, an attempt was also made to divide the pre-announcement window (-1, -20) into two windows, (-1,-10) and (-11,-20). Table 4.7 Average Abnormal Returns During Pre-Announcement Period: Acquirer Companies Window Day #AAR CAAR SE_CAAR t-statistic (-1,-1) 0.007231 - - - (-1,-2) 0.000169 0.007400 - - (-1,-3) 0.003545 0.010946 - - (-1,-4) 0.006281 0.017226 - - (-1,-5) -0.005143 0.012083 - - (-1,-6) -0.001061 0.011023* 0.004139 2.663223 (-1,-7) 0.003425 0.014447* 0.004007 3.605533 (-1,-8) 0.003828 0.018276* 0.003989 4.581353 (-1,-9) 0.003201 0.021477* 0.004022 5.340095 (-1,-10) -0.000996 0.020480* 0.003976 5.151083 (-1,-11) 0.006691 0.027172* 0.003990 6.810586 (-1,-12) -0.002464 0.024708* 0.004027 6.134876 (-1,-13) -0.003029 0.021679* 0.004035 5.373042 (-1,-14) 0.001928 0.023607* 0.004034 5.852643 (-1,-15) 0.001608 0.025215* 0.004141 6.089668 (-1,-16) -0.000372 0.024843* 0.004122 6.026581 (-1,-17) 0.007090 0.031933* 0.004095 7.797441 (-1,-18) -0.003167 0.028766* 0.004808 5.983132 (-1,-19) 0.010998 0.039764* 0.004788 8.305194 (-1,-20) 0.009104 0.048868* 0.005337 9.156947 (-11,-20) - 0.028387* 0.006503 4.365557 Note: The SE_CAAR and t-statistic have not been computed for the first five windows due very small number of observations (days) in these windows. *Values are significant at 5% level of significance #AAR relates to the last day in the window 112

Chapter 4 M&A Announcement and Shareholder s Wealth: Acquirer Company As may be observed from the Table 4.7, AAR is positive from -4 day to -1. Before that no specific pattern could be observed. As mentioned in Table 4.2A, CAAR for the pre-announcement window (day -1 to -20 days) was positive (0.048868) and significant. CAAR for acquiring companies was positive and statistically significant for each of the windows during the preannouncement period without any exception. This explains the positive and significant CAAR for the pre-announcement period. Moreover, the cumulative abnormal returns show a tendency to increase as we expand the window, indicating that average abnormal returns are high as early as 20 days before the M&A announcement. It is interesting to note that CAAR is 0.028387 and statistically significant during the window -11, -20 day, as compared to CAAR is 0.020480 for the window -1, -10. Thus, it may be concluded that there are opportunities for generating abnormal returns in each of the windows selected during the pre-announcement. Moreover, it is also observed that longer is the window, greater is the value of CAAR during the 20 days preannouncement period and positive AARs are higher in the earlier half of the window as compared to the one close to the date of the announcement. 4.6.3. CAAR and AAR During the 41 Days Around the Date of Announcement An attempt was also made to examine the behavior of cumulative abnormal returns during the time windows covering both the pre-announcement and post-announcement period. For this purpose, 20 windows were formed by adding one day before the announcement and one day after the announcement to the previous window. The CAAR and the t value for each of the windows are given in Table 4.8. As may be observed from Table 4.8, CAAR for acquiring companies was positive and statistically significant for each of the windows during the 41 day period around the date of announcement, without any exception. This is perhaps because of high positive abnormal returns during the pre-announcement period and insignificant average abnormal returns during the post-announcement period. However, the cumulative abnormal returns do not exhibit any fixed pattern of behavior in either direction. This is perhaps due to the negative though insignificant average abnormal returns during the 113

Chapter 4 M&A Announcement and Shareholder s Wealth: Acquirer Company post-announcement period. Thus, it may be concluded that there are opportunities for generating abnormal returns in each of the windows selected during the 41-day period around the date of announcement date. Table 4.8 Average Abnormal Returns Around the Announcement Date: Acquirer Companies Window Day CAAR SE_CAAR t-statistic (-1,+1) 0.015570 - - (-2,+2) 0.014450* 0.005178 2.790625 (-3,+3) 0.016757* 0.005167 3.243035 (-4,+4) 0.023774* 0.005137 4.628284 (-5,+5) 0.011487* 0.004915 2.337053 (-6,+6) 0.011185* 0.004786 2.336918 (-7,+7) 0.011416* 0.004595 2.484560 (-8,+8) 0.021244* 0.004524 4.695490 (-9,+9) 0.026937* 0.004534 5.940559 (-10,+10) 0.030563* 0.004537 6.736006 (-11,+11) 0.037060* 0.004525 8.189795 (-12,+12) 0.034541* 0.004533 7.620516 (-13,+13) 0.030892* 0.004534 6.813982 (-14,+14) 0.027440* 0.004495 6.104331 (-15,+15) 0.027484* 0.004514 6.088282 (-16,+16) 0.025523* 0.004456 5.728440 (-17,+17) 0.027998* 0.004412 6.345579 (-18,+18) 0.025706* 0.004750 5.412404 (-19,+19) 0.039980* 0.004748 8.420931 (-20,+20) 0.043168* 0.004788 9.015067 Note: The SE_CAAR and t- statistic have not been computed for the first window due very small number of observations (days) in this window. *Values are significant at 5% level of significance 114

Chapter 4 M&A Announcement and Shareholder s Wealth: Acquirer Company Chart 4.1 presents the behavior of AAR during the entire 41 days period around the date of announcement. Chart 4.1 AARs During the 41 Day Period: Acquirer Companies 1.50% AAR 1.00% 0.50% 0.00% -0.50% -20-18-16-14-12-10 -8-6 -4-2 0 2 4 6 8 10 12 14 16 18 20 Day -1.00% The chart points towards an important window that offers opportunities for developing trading strategies is -4,0. For this five-day window, the CAAR is 2.85%, which is very high for such a short window. Another window of opportunity for developing profitable trading strategy is -19,-20 which has a CAAR of 2.01% for a small window of 2 days. The investment manager can go long during these windows and earn extra-normal returns. For the remaining period, no specific pattern was observed. 4.7. Conclusion The above analysis offers very useful conclusions about the market reaction to M&A announcement for acquirer companies in India. On ex-post basis, individual analysis suggests that there is significant impact of M&A announcement on stock returns for almost half of the sample acquirer companies. In other words, the Indian stock market is not efficient in the semi-strong form with respect to M&A announcement information for acquirer companies. Thus, the investment analyst cannot ignore the information regarding the M&A deals. The results relating to the direction of price reaction are, however, mixed as positive abnormal returns occur as often as negative 115

Chapter 4 M&A Announcement and Shareholder s Wealth: Acquirer Company abnormal returns on post-event basis. On aggregate basis, CAARj is statistically not significant. It stood at -0.57% (t-statistic= -1.19234) for the twenty-one-days period. During the pre-announcement period, more than two-third of the sample companies witnessed statistically significant CAR values. Individually, positive CAR occurs more often than the negative CAR during this period. At aggregate level, the CAAR is positive and statistically significant with a value of 4.89% (t-statistic= 9.156947). Thus, the study offers a clinching evidence for existence of significant abnormal returns even before the M&A announcement. The existence of statistically significant CAR in many cases during the pre-announcement period points toward possibility of leakages of M&A information which may be exploited by the market traders on pre event basis. These findings are consistent with the finding of a number of studies regarding M&As in India (Sehgal, Banerjee & Deisting, 2012; Kumar & Panneerselvam, 2009; Sehgal, Singh & Choudhary, 2005) and M&As abroad (Mitchell & Lehn, 1990; Smith & Kim, 1994; Walker, 2000). It was further observed that the direction of the preannouncement CAR for the acquirer companies provides useful information regarding the direction of CAR in the post announcement period. The study documents significant relationship between the pre and post-announcement abnormal returns for acquirer companies. Further, it may be generally concluded that for shares of acquiring companies, the positive or negative expectations built-up during pre-announcement period tend to die out more quickly than in cases where there are no significant expectations. As regards the impact of M&A announcement on other stock characteristics, no significant impact was observed on stock return volatility and trading liquidity, in so far as the acquirer companies are concerned. In other words, return volatility and trading liquidity characteristics of sample acquirer stock do not vary significantly in the pre and post-event period. Hence, from the perspective of investment analyst, stock return volatility and trading liquidity do not seem to provide any additional information for framing trading strategies. An analysis of post-event abnormal returns during various time windows also provides very useful clues for investment analysts. Observing the pattern of post-event CAARs 116

Chapter 4 M&A Announcement and Shareholder s Wealth: Acquirer Company for different short-term event windows, significantly positive CAAR of almost 1.01% (t-statistics=2.00567) is reported over the first 11 days (including the event day). This is in contrast with CAAR during later half of the post event period ( -11,-20 day) which was -1.58% (t-statistic= -3.50658). Thus, investors seem to be optimistic in the first phase of post event period, which is followed by correction in the second phase resulting in negative returns. From the perspective of investment analyst, the best portfolio formation window seems to be (-4,0 day), promising a cumulative return of about 2.85% for the 5 day period. Thus, the investment analyst can build profitable trading strategies by taking long positions in acquiring company s stocks 4 days prior to the M&A announcement date and exit at the end of the event day. 117

Chapter 4 M&A Announcement and Shareholder s Wealth: Acquirer Company References Cheung, K.Y. & Wong, A. (2009). The Effects of Merger and Acquisition Announcements on the Security Prices of Bidding Firms and Target Firms in Asia. International Journal of Economics and Finance, 1(2), 274-283. Kumar B.R., Panneerselvam S. & Siddaganga S., (2009) Mergers, Acquisitions and Wealth Creation: A Comparative Study in the Indian Context, IIMB Management Review, pp. 222-244. Kumar M., Kumar S., & Deisting F. (2013) Wealth effects of bank mergers in India: a study of impact on share prices, volatility and liquidity, Banks and Bank Systems, Volume 8, Issue 1, 2013. Martynova, M., & Renneborg, L. (2006). The Performance of the European Market for Corporate Control: Evidence from the 5th Takeover Wave. (ECGI - Finance Working Paper No. 135/2006.) Mitchell, M.L. & Lehn, K. (1990). Do Bad Bidders Become Good Targets? Journal of Political Economy, 98, pp. 372-98. Sehgal, S., Banerjee S. & Deisting, F. (2012) The impact of M&A announcement and financing strategy on stock returns: Evidence from BRICKS markets. International Journal of Economics and Finance, Vol. 4, No. 11; 2012. Smith, A. and Kim, J. (1994). The combined effects of free cash flow and financial slack on bidder and target stock returns. Journal of Business, 67, 281 310. Walker, M. (2000). Corporate takeovers, strategic objectives and acquiring firm shareholder wealth. Financial Management, 53 66. 118

Table 5.1 Post-Announcement CAR and CAAR: Target Companies Company CARj Std. dev. of abnormal return t-statistic TC1 0.177672* 0.040913 4.342647 TC2 0.008230 0.022564 0.364727 TC3-0.037993* 0.017600-2.158680 TC4-0.071131* 0.027558-2.581114 TC5 0.021248 0.033983 0.625244 TC6 0.106063* 0.047975 2.210813 TC7 0.097055 0.047325 2.050847 TC8 0.098173* 0.023103 4.249401 TC9-0.026585* 0.011254-2.362218 TC10 0.032584* 0.010455 3.116530 TC11-0.263062* 0.016733-15.721241 TC12-0.147100* 0.034056-4.319424 TC13-0.005998 0.012650-0.474152 TC14-0.308284* 0.031338-9.837522 TC15-0.208375* 0.043772-4.760483 TC16-0.285411* 0.050659-5.633978 TC17-0.145228* 0.026216-5.539580 TC18-0.063974* 0.021362-2.994828 TC19 0.149307* 0.043016 3.470985 TC20 0.723870* 0.059508 12.164295 TC21 0.354827* 0.063933 5.549971 TC22-0.248970* 0.023463-10.611173 TC23-0.042679 0.037498-1.138164 TC24 0.125089 0.079365 1.576133 TC25 0.214493* 0.036683 5.847286 TC26-0.038181* 0.015536-2.457614 TC27-0.050532 0.030903-1.635213 TC28-0.466253* 0.040233-11.588903 TC29-0.094810* 0.018899-5.016664 TC30-0.007056 0.031483-0.224130 TC31-0.022692 0.028683-0.791124 TC32 0.024869 0.042071 0.591111 TC33 0.034178 0.028162 1.213598 TC34 0.068865* 0.023123 2.978128 TC35-0.040622 0.024595-1.651620 TC36 0.562042* 0.036298 15.484308 TC37 0.348433* 0.033055 10.540892 120

Table 5.1A presents a summary of the results relating to CAR as given in Table 5.1 along with the values of CAAR for the post announcement period. Table 5.1A Summary of Post-Announcement CAR and CAAR: Target Companies CARj Positive Negative Total Positive% Negative% Significant 11 14 25 30% 38% Insignificant 6 6 12 16% 16% Total 17 20 37 46% 54% CAARj 0.01546 SCAARj 2.60824 Individually, the number of cases where the CAR was significant is 25 out of 37 cases (68%). Thus, it may be concluded that semi strong efficiency does not hold for target company stocks in almost 2/3rd of the cases, (i.e. the publicly available information is not absorbed immediately). Out of the cases where CAR was significant, only in 30% cases CAR was positive and in 38% cases, it was negative. Thus, the results are mixed and negative abnormal returns occur more often than positive abnormal returns. On an aggregate basis, CAARj is positive and statistically significant. It stood at +1.55% for the twenty-one-days period. This may imply that target companies have stronger position than the acquirer companies, tilting the bargain in favour of target companies. The significant and positive abnormal returns on aggregate basis when there is relatively higher percentage of cases with negative CAR, can be explained by the possibilities of higher values of positive abnormal returns that may distort CAAR results. Thus, the hypothesis VI that M&A announcement generates significant abnormal returns for target company in the post announcement period is supported. However, the results are mixed though negative abnormal returns occur more often than positive abnormal return. On aggregate basis, positive abnormal returns were observed on post 121

announcement basis, in so as far as target companies are concerned. The above findings are consistent with the finding of a number of studies regarding M&As in India. (Anand & Singh, 2008; Kumar & Penneerselvam, 2009; Sanjay, Banerjee & Deisting, 2012). 5.2. M&A Announcement and Stock Returns for Target Companies: Pre-Announcement Period M&A announcement is one of the biggest events in the life of a company that is being acquired. With wide spread consensus on the possibilities of positive impact on share prices of target companies, corporate insiders can take undue advantage of prior access to information regarding M&A transaction, resulting in significant abnormal returns much prior to the public announcement of M&A. Even in developed market economies like USA, a great deal of insider trading takes place before M&A announcements, inspite of the fact that such countries have well-developed regulatory framework for corporate governance and investor protection. In August 2006, the New York Times reported that securities of over 40% of the companies receiving buyout bids exhibited suspicious trading in the weeks before the deals became public 3. In the emerging market economies like India, the regulatory framework is at its infancy and there is lack of strong enforcement mechanism to ensure that insiders are not able to exploit their advantage of having access to information. Thus, information leakages may take place in such markets, resulting in abnormal returns in the pre-announcement period. In this section, an attempt has been made to examine the impact of M&A announcement on the share prices of target companies, during the pre-announcement period taking the 20 days window (-1 day to -20 day). The computed values of the pre-announcement period cumulated abnormal return (CARi) along with the values of standardized CARi (SCARi) for each target company in the sample, for the pre- announcement period are given in Table 5.2. 3 Morgenson, G., (2006.) Whispers of mergers set off bouts of suspicious trading. New York Times A1 August 27. 122

Table 5.2 Pre-Announcement CAR and CAAR: Target Companies Company CARi Std. dev. of abnormal return t-statistic TC1-0.245699* 0.062548-3.928184 TC2-0.273389* 0.032262-8.474040 TC3 0.132818* 0.030887 4.300136 TC4-0.005159 0.026788-0.192574 TC5 0.092634* 0.035640 2.599173 TC6 0.018595 0.050040 0.371610 TC7 0.204847* 0.047871 4.279108 TC8 0.485940* 0.047302 10.273060 TC9 0.049513 0.024249 2.041818 TC10 0.101081* 0.014888 6.789243 TC11-0.324830* 0.046519-6.982804 TC12 0.145333* 0.052733 2.756020 TC13-0.001937 0.015511-0.124880 TC14-0.160314* 0.042311-3.788899 TC15 0.386010* 0.067384 5.728550 TC16 0.203527* 0.045351 4.487770 TC17-0.015466 0.038319-0.403604 TC18 0.126419* 0.020101 6.289203 TC19-0.031034 0.047450-0.654035 TC20 0.008047 0.042720 0.188357 TC21-0.409185* 0.057785-7.081193 TC22-0.095194 0.057392-1.658666 TC23 0.278435* 0.046371 6.004544 TC24 0.047991 0.028329 1.694057 TC25 0.402138* 0.039431 10.198424 TC26-0.121291* 0.037999-3.191931 TC27 0.016211 0.036948 0.438755 TC28-0.513564* 0.034596-14.844773 TC29-0.112027* 0.021197-5.285037 TC30 0.293729* 0.021381 13.737639 TC31 0.261886* 0.039708 6.595298 TC32-0.119978* 0.036565-3.281231 TC33-0.070574* 0.029393-2.401077 TC34-0.097897* 0.025991-3.766641 TC35 0.134917* 0.017650 7.644085 TC36 0.262378* 0.033828 7.756298 TC37-0.000708 0.029959-0.023623 123

Table 5.2A presents a summary of the results relating to CAR for target companies, as given in Table 5.2 along with the values of CAAR for the post announcement period. Table 5.2A Summary of Pre-Announcement CAR and CAAR: Target Companies CARi Positive Negative Total Positive% Negative% Significant 15 11 26 41% 30% Insignificant 5 6 11 14% 16% Total 20 17 37 54% 46% CAARi 0.02849 SCAARi 4.37287 As may be observed from Table 5.2A, on individual basis, almost three-fourth (71%) of the sample companies witnessed statistically significant CAR during the preannouncement period. Out of 37 target companies in the sample, 15 (41%) had positive and significant pre-announcement period CAR values as compared to 30% during the post-announcement period. 11 (30%) companies had significant negative CAR during the pre-announcement period. For all the target companies as a whole, the CAAR is positive (2.85%) and statistically significant at 5% level of significance, during the preannouncement period. These results are consistent as the proportion of positive CAR cases is higher than that of negative CAR cases in the pre-announcement period. Thus, the hypothesis VII that Significantly abnormal returns do exist for the target companies during the pre-announcement period is supported. However, the results are mixed and positive abnormal returns occur more often than negative abnormal returns, during the pre-announcement period. These results are consistent with the findings of earlier studies in India (Kumar & Singh, Kumar & Panneerselvam 2009, Sanjay, Banerjee & Deisting, 2012) The existence of statistically significant CAR in vast majority (71%) of the target companies during the pre-announcement period points toward possible leakage of 124

M&A information, which may be exploited by the corporate insiders during the preevent period. As CAR is statistically significant in majority of the target companies and not in exceptional cases, and it should be matter of concern for the market regulator (viz. SEBI). For the target companies, significant abnormal returns in the pre-announcement period were witnessed, which could be caused by rumours or possible leakage of information regarding the M&A transaction before the public announcement of M&A deal. For the regulator, it may be difficult to regulate and completely eliminate the possibility of rumours. But the market regulator should be concerned if the pre-announcement period CAR exists due to leakage of information, as it reflects weak regulation and possible presence of insider trading. Keeping this in mind, we can generally conclude that the market believes that shares of target companies to be relatively under-priced. The market participants seem to preempt this information and the optimism continues even after M&A announcement. Empirical results support the investor behavior as significantly positive CAAR values are observed both on pre as well as post-event basis. 5.3. Relationship between Abnormal Returns for Target Companies in Post-Announcement and Pre-Announcement Windows The relationship between CAR in the post announcement period with that of the preannouncement period, could be interesting as it may provide some insight into the causes of abnormal returns and CAR during the pre-announcement period. In the following analysis, an attempt has been made to examine the relationship between preannouncement CAR and post-announcement CAR. Table 5.3 shows the direction of CARi and CARj as well as the significance of CARi and CARj for each of the sample target companies. The detailed one-to-one correspondence of CARs for the sample companies are represented in Table 5.3. 125

Table 5.3 Relationship between Pre-Announcement CAR (CARi) and Post-Announcement CAR (CARj): Target Companies Company Direction of CARi Significance of CARi Direction of CARj Significance of CARj TC1 Negative Significant Positive Significant TC2 Negative Significant Positive Insignificant TC3 Positive Significant Negative Significant TC4 Negative Insignificant Negative Significant TC5 Positive Significant Positive Insignificant TC6 Positive Insignificant Positive Significant TC7 Positive Significant Positive Insignificant TC8 Positive Significant Positive Significant TC9 Positive Insignificant Negative Significant TC10 Positive Significant Positive Significant TC11 Negative Significant Negative Significant TC12 Positive Significant Negative Significant TC13 Negative Insignificant Negative Insignificant TC14 Negative Significant Negative Significant TC15 Positive Significant Negative Significant TC16 Positive Significant Negative Significant TC17 Negative Insignificant Negative Significant TC18 Positive Significant Negative Significant TC19 Negative Insignificant Positive Significant TC20 Positive Insignificant Positive Significant TC21 Negative Significant Positive Significant TC22 Negative Insignificant Negative Significant TC23 Positive Significant Negative Insignificant TC24 Positive Insignificant Positive Insignificant TC25 Positive Significant Positive Significant TC26 Negative Significant Negative Significant TC27 Positive Insignificant Negative Insignificant TC28 Negative Significant Negative Significant TC29 Negative Significant Negative Significant TC30 Positive Significant Negative Insignificant TC31 Positive Significant Negative Insignificant TC32 Negative Significant Positive Insignificant TC33 Negative Significant Positive Insignificant TC34 Negative Significant Positive Significant TC35 Positive Significant Negative Insignificant TC36 Positive Significant Positive Significant TC37 Negative Insignificant Positive Significant 126

The detailed one-to-one correspondence of CARs for the sample companies as represented in Table 5.3, indicates no specific pattern. In order to examine the relationship between the pre-announcement CAR and postannouncement CAR, the sample target companies were divided into three sets. Set I consisted of the cases in which pre-announcement CAR (CARi) was found to be positive and statistically significant.set II, contained cases in which pre-announcement CAR (CARi) was found to be negative and statistically significant. The remaining cases were those in which CARi was not found to be statistically significant and were included in Set-III. For each of the cases in the three sets, individual comparisons were made between the pre-announcement CAR and post-announcement CAR. Table 5.3A provides a summary of the results with regard to these comparisons. Table 5.3A Relationship between CARi and CARj: Summary for Target Companies CARi No. of cases CARj No. of cases Percentage Set-I Positive Significant 15 Positive 4 27% Negative 5 33% Insignificant 6 40% Set-II Negative Significant 11 Positive 3 27% Negative 5 45% Insignificant 3 27% Set-III Insignificant 11 Positive 4 36% Negative 4 36% Insignificant 3 27% Total 37 As may be observed from Table 5.3A, out of 15 cases where the pre-announcement CAR was positive and significant, in one-fourth of the cases (4), post-announcement CAR was also positive. In other words, only in 27% of the cases, positive preannouncement CAR was followed by positive post announcement CAR. In slightly greater proportions (33%), positive pre-announcement CAR was followed by negative post-announcement CAR. 127

It seems that in most cases where market builds up positive expectations prior to the event date, the pre-event optimism seems to die out immediately after the event, when the terms and conditions of M&A deal are publicly known. Further, the possibility of optimism (positive CARi) giving way to pessimism (Negative CARj) is very low (33%). Out of 11 cases where the pre-announcement CAR was negative, only in 3 (27%) cases, post-announcement CAR was positive. Negative pre-announcement CAR is followed by a negative post-announcement CAR only in 45% of the cases. The results indicate that in the case of negative CAR, the market is absorbing the information relatively slow as negative pre-announcement CAR is followed by negative post announcement CAR in 45% of the cases. It seems that if market builds up negative expectations prior to the event date, there are more chances that pre-event pessimism continues after the event, when the terms and conditions of M&A deal are publicly known. Further, the possibility of pessimism giving way to optimism is very low (27%). If there is no significant movement in the share prices during the pre-announcement period, it is less likely to result in insignificant CAR during the post-announcement period. In 11 cases the pre-announcement CAR was not significant. Out of these, in 36% cases, insignificant pre-announcement CAR was followed by positive post announcement CAR. The post-announcement CAR was found to be negative in 36% cases and statistically insignificant in only in 27% cases. Thus, insignificant CAR in pre-announcement period does result in some surprise element in the post event period and the positive CAR is as often as negative CAR in post announcement period. This leads to the conclusion that in case of target companies, if pre-announcement CAR is insignificant, reversal to significant (positive or negative) CAR is highly likely (72%) in the post announcement. Further, there are equal chances of insignificant CAR in preannouncement period giving way to positive or negative CAR in post-announcement period. Above results indicate that the direction of the pre-announcement CAR for the target companies does provide some clues regarding the direction of CAR in the post announcement period. Thus, the hypothesis VIII that There is a significant relationship 128

between the pre-announcement abnormal returns and post-announcement returns for target companies is supported. Further, it may be generally concluded that positive and expectations built-up during pre-announcement period die out more quickly than the negative expectations. The above findings offer important clues for the investment managers, who might be looking for opportunities for extra normal returns in the share prices of target companies around the date of announcement of M&A deals. It may be concluded that pre-announcement positive CAR is an early warning of most likely negative or insignificant CAR in the post announcement period, with the exceptions limited to only one-fourth of the cases. Pre-announcement negative CAR is also more likely followed by negative CAR in the post announcement period. If the pre-announcement CAR is insignificant, it is highly likely that it will be followed by significant positive or negative CAR in the post announcement period. Thus, in case of shares of target companies, there is significant relationship between abnormal returns during the pre-announcement period and post announcement period. Further, it may be generally concluded that positive expectations built-up during preannouncement period die out more quickly than the negative or insignificant expectations. Section II M&A Announcement and other Stock Characteristics This section is devoted to the discussions regarding the impact of two important stock characteristics that may have impact on the shareholder s wealth. These are stock return volatility and trading liquidity of the shares of the target company. 5.4. M&A Announcement and Return Volatility An important characteristic of share prices is the degree of volatility in the stock return. M&A announcement may have impact on the volatility in the stock returns. Generally, increase in return volatility will have negative impact on shareholder s wealth and decreased volatility will have value creation effect for the shareholders. 129

In this study, an attempt was made to compare the volatility in stock returns before and after the merger announcement during the pre-event and post event windows. In other words, the return volatility was measured for the window - 1 to -20 days for preannouncement period (σi 2 ) and the window 0 to +20 days for the post-announcement period (σj 2 ). Variance of stock returns has been used as a measure of volatility. The impact of merger announcement on volatility has been examined on daily returns. The ratio between σi 2 and σj 2 for each of the sample companies was computed for the purposes of comparison. Table 5.4 presents the pre-announcement (σi 2 ) and postannouncement volatility (σj 2 ). It also shows the ratio between σi 2 and σj 2 (taking the higher value in the numerator and lower value in the denominator) and the F-values for each of the sample companies. Table 5.4 M&A Announcement and Change in Return Volatility: Target Companies Company Variance_1 Variance _2 F-value Increase Sig/Insign TC1 0.004086 0.001698 2.406117 No Signi TC2 0.000971 0.000565 1.717785 No Insigni TC3 0.001483 0.000209 7.078141 No Signi TC4 0.000715 0.000779 1.089485 Yes Insigni TC5 0.001289 0.001213 1.062545 No Insigni TC6 0.002317 0.002314 1.001330 No Insigni TC7 0.002194 0.002200 1.002792 Yes Insigni TC8 0.001506 0.000848 1.777172 No Insigni TC9 0.000675 0.000166 4.056647 No Signi TC10 0.000286 0.000086 3.301934 No Signi TC11 0.002492 0.000169 14.72374 No Signi TC12 0.002974 0.000993 2.995073 No Signi TC13 0.000476 0.000265 1.797640 No Insigni TC14 0.002776 0.002438 1.138921 No Insigni TC15 0.004926 0.001899 2.593470 No Signi TC16 0.002050 0.002678 1.306440 Yes Insigni TC17 0.002116 0.000795 2.662688 No Signi 130

Company Variance_1 Variance _2 F-value Increase Sig/Insign TC18 0.000539 0.000529 1.017153 No Insigni TC19 0.002559 0.002255 1.134642 No Insigni TC20 0.002011 0.003702 1.840665 Yes Insigni TC21 0.004076 0.004542 1.114307 Yes Insigni TC22 0.004245 0.001319 3.218662 No Signi TC23 0.002243 0.001519 1.477012 No Insigni TC24 0.000816 0.006354 7.785682 Yes Signi TC25 0.001755 0.001518 1.156747 No Insigni TC26 0.001521 0.000243 6.265669 No Signi TC27 0.001424 0.001316 1.081886 No Insigni TC28 0.001350 0.001572 1.164500 Yes Insigni TC29 0.000762 0.000346 2.204175 No Signi TC30 0.000456 0.001028 2.253695 Yes Signi TC31 0.002084 0.001086 1.918786 No Insigni TC32 0.001355 0.001353 1.001288 No Insigni TC33 0.000931 0.000976 1.048197 Yes Insigni TC34 0.000972 0.000645 1.506477 No Insigni TC35 0.000356 0.000698 1.961356 Yes Insigni TC36 0.001193 0.001280 1.072585 Yes Insigni TC37 0.000648 0.001976 3.047709 Yes Signi The summary results are presented in Table 5.4A Table 5.4A M&A Announcement and Change in Return Volatility: Summary Results (Target Companies) Change in Volatility No. of Cases Percentage Significant Increase 3 8% Significant Decrease 11 30% Insignificant Change 23 62% Total 37 100% 131

Impact of M&A announcement on volatility would depend upon the difference in the expected risk of integration and the diversification gains that may accrue in case the cash flows of the two companies are imperfectly correlated. As may be observed from this table, in majority of the cases (62%), there was no significant change in the return volatility. Among the cases, where the volatility did change significantly, it was only decrease in volatility. Thus, the hypothesis IX that M&A announcement does not have significant impact on stock return volatility of target company is supported. The above results are consistent with the findings of Kumar et al. (2013) but contrary to the findings of Sanjay, Banerjee & Deisting (2012). The findings differ perhaps due to the difference in the period of study. 5.5. M&A Announcement and Trading Liquidity Liquidity, as a characteristic of an asset, reflects the degree to which it can be bought or sold in the market without affecting its price. Liquidity in the context of securities is characterized by high level of trading activity as reflected in the trading volume. Increased in trading liquidity of a share would generally mean value creation and any decline in the trading liquidity will have negative effect on the shareholder s wealth. In order to examine the impact of M&A announcement on trading liquidity, changes in the daily trading volumes in terms of number of shares were compared during the preannouncement period and post-announcement period. Trading liquidity was estimated by first calculating natural log of the daily trading volumes and then finding the means of the pre-announcement and post announcement windows. The difference between the means was tested using t-test. The t-statistic was ascertained by dividing this difference by the standard error. Pre-event trading liquidity has been calculated from -1 to -20 days and is termed as µ i. Post-event trading liquidity has been calculated from 0 day to +20 days and is termed as µ j. The results were tested at 5% level of significance. Table 5.5 presents the pre-announcement (µ i ) and post-announcement trading liquidity (µ j ). It also shows the t-statistic for each of the sample companies. 132

Table 5.5 M&A Announcement and Change in Trading Liquidity: Target Companies Company Change in Log SE t-statistic Volume TC1-0.32402 0.43672-1.80951 TC2 0.59513 0.27673 1.37206 TC3 0.15611 0.19721 0.20780 TC4-0.02484 0.20912 0.99944 TC5 1.08716 0.19045-0.86759 TC6 1.62073 0.44086 1.81657 TC7 0.84857 0.30855 1.87841 TC8 1.11150 0.17271-0.31707 TC9-0.68578 0.30093-0.15822 TC10-0.08400 0.25046-0.54174 TC11-1.54049* 0.28580 2.11302 TC12-0.31086* 0.17326-4.03095 TC13-0.31953* 0.16051-2.56176 TC14-0.78911* 0.39116-2.49765 TC15 1.04543* 0.42670-3.28888 TC16 0.49972* 0.32550 3.50187 TC17-0.80524* 0.07996 2.98418 TC18-0.47163 0.15863-1.17719 TC19 0.09815* 0.23861 3.47727 TC20 4.82233 0.27040-1.87199 TC21-0.80669* 0.31271 9.20977 TC22-0.18164* 0.28804 2.65864 TC23-0.40141 0.24227 0.92881 TC24 1.59984 0.14283-0.50550 TC25 0.83431 0.18308 0.44822 TC26 0.36249 0.26163 1.82058 TC27 0.27051* 0.23160 2.35545 TC28-0.81613 0.15451 1.14231 TC29 0.92572 0.20454 0.21675 TC30 0.12670* 0.16841-4.78152 TC31-1.78425 0.23397-1.80463 TC32-0.42577 0.18763 0.83396 TC33-1.10519 0.16302 0.08238 TC34 0.34840 0.14746 1.79849 TC35 0.27298 0.16679-1.10315 TC36-0.24848 0.17997-1.77175 TC37 0.15257 0.56565 0.44568 * Significant at 5% level of significance 133

Table 5.5 shows that in 21 out of 37 companies the change in the trading liquidity is not statistically significant. A summary of the above results is presented in Table 5.5A. Table 5.5A M&A Announcement and Change in Trading Liquidity: Summary Results- Target Companies Change in Trading Liquidity No. of Cases Percentage Significant Increase 8 22% Significant Decrease 8 22% Insignificant Change 21 57% Total 37 100% As may be observed from this table, in more than half of the cases (57%), there was no significant change in the trading liquidity after the M&A announcement. Only in 22% of cases, there was significant increase in the trading liquidity and in equal proportion of the cases; there was significant decrease in the trading liquidity. Thus, the hypothesis X that M&A announcement does not have significant impact on trading liquidity of the shares of target company is supported. Our results are consistent with the findings of Sanjay, Banerjee & Deisting (2012) and Kumar et al. (2013). Section III Abnormal Returns for Target Companies in Different Time Window This section is devoted to analysis of abnormal returns for shares of target companies during various time windows. 5.6 Average Abnormal During Different Time Windows: Post-Announcement Period An attempt was also made to analyze the behavior of cumulative average abnormal returns for the sample target companies during different time windows. Such an analysis may be useful in understanding the aggregate results and also in formulating profitable trading strategies. 134

5.6.1. CAAR for Target Companies During the Post-Announcement Period It may be noted that CAAR for the post-announcement window (day 0 to +20 days) was positive (+0.01546) and significant. In order to get some clues regarding the potential opportunities for generating abnormal returns, the behavior of CAAR was examined for the target companies during 20 windows, each window being bigger than the previous by a day. Table 5.6 presents cumulative daily average abnormal returns and the t values for various time windows the post announcement period of 21 days (day 0 to day 20). Table 5.6 Average Abnormal Returns During Post-Announcement Period: Target Companies Window Day #AAR CAAR SE_CAAR t-statistic (0,0) 0.027136 - - - (0,1) 0.015038 0.042174 - - (0,2) 0.009043 0.051217 - - (0,3) 0.005224 0.056441 - - (0,4) -0.001344 0.055097 - - (0,5) -0.002321 0.052776 0.006444 8.189841 (0,6) -0.000056 0.052720 0.006383 8.259614 (0,7) 0.002018 0.054738 0.006268 8.732535 (0,8) -0.009859 0.044879 0.006146 7.302256 (0,9) 0.002376 0.047255 0.006007 7.866383 (0,10) 0.002442 0.049698 0.006055 8.207881 (0,11) -0.003321 0.046377 0.005901 7.858654 (0,12) -0.004111 0.042266 0.005767 7.328396 (0,13) 0.003835 0.046101 0.005700 8.088341 (0,14) 0.009569 0.055670 0.005823 9.560132 (0,15) -0.010363 0.045306 0.005936 7.632968 (0,16) -0.006106 0.039201 0.005977 6.558957 (0,17) -0.007632 0.031569 0.005937 5.317050 (0,18) -0.003426 0.028142 0.005923 4.751075 (0,19) 0.001609 0.029751 0.005918 5.027269 (0,20) -0.014290 0.015461 0.005928 2.608242 (11,20) - -0.034236 0.005470-6.258827 Note: The SE_CAAR and t statistic have not been computed for the first five windows due very small number of observations (days) in these windows. *Values are significant at 5% level of significance #AAR relates to the last day in the window 135

As may be observed from the above table, CAAR for target companies was statistically significant for each of the windows during the post-announcement period, without any exception. This explains the significant CAAR for the post-announcement period for the target companies. However, it may be noted that for the later half of the postannouncement period (+11,+20), CAAR is negative and statistically significant, while the earlier half of the period (0,+10) has the positive and significant CAAR. This implies that the earlier gains in the first 11 days of the post-announcement period are to some extent offset by the negative AARs in the remaining 10 days of the postannouncement period. 5.6.2. CAAR During the Pre-Announcement Period As mentioned earlier in this chapter, CAAR for the pre-announcement window (day -1 to -20 days) was positive (0.02849) and significant. An analysis of the behavior of CAAR during the pre-announcement period was examined during 19 windows, each window being bigger than the previous by a day. Table 5.7 presents cumulative daily average abnormal returns and the t-values for various time windows in the post announcement period of 21 days (day 0 to day 20). ). In addition, an attempt was also made to divide the pre-announcement window (-1, -20) into two windows, (-1,-10) and (-11,-20). As may be observed from Table 5.7, CAAR for target companies was positive and statistically significant for each of the windows during the pre-announcement period without any exception. This explains the positive and significant CAAR for the preannouncement period for the target companies. Moreover, the cumulative abnormal returns show a tendency to increase as we expand the window till 10 days prior to announcement, indicating that average abnormal returns are high as early as 10 days before the M&A announcement. It is interesting to note that CAAR is negative (- 0.011514) and statistically significant during the window -11, -20 day, as compared to CAAR is 0.040006 for the window -1, -10. Thus, it may be concluded that there are opportunities for generating abnormal returns in both of these windows during the preannouncement period. Going long during the 10 days prior to announcement and shortselling strategies during the -11,-20 window may be profitable trading strategies in case of shares of target companies. 136

Table 5.7 Average Abnormal Returns During Pre-Announcement Period: Target Companies Window Day #AAR CAAR SE_CAAR t-statistic (-1,-1) 0.011410 - - - (-1,-2) 0.003562 0.014973 0.005873 - (-1,-3) 0.001365 0.016337 0.006465 - (-1,-4) 0.006096 0.022433 0.006600 - (-1,-5) 0.007052 0.029485* 0.006417 4.594490 (-1,-6) 0.004329 0.033814* 0.006199 5.454646 (-1,-7) -0.001941 0.031873* 0.006235 5.112371 (-1,-8) -0.004127 0.027746* 0.006020 4.608938 (-1,-9) 0.013208 0.040954* 0.005940 6.894291 (-1,-10) -0.000948 0.040006* 0.005975 6.695408 (-1,-11) -0.003461 0.036545* 0.005931 6.161896 (-1,-12) -0.003655 0.032889* 0.006156 5.343023 (-1,-13) -0.005809 0.027080* 0.006159 4.396992 (-1,-14) -0.004406 0.022674* 0.006219 3.645828 (-1,-15) 0.014312 0.036985* 0.006366 5.809948 (-1,-16) -0.000353 0.036633* 0.006425 5.701151 (-1,-17) 0.001914 0.038547* 0.006375 6.046489 (-1,-18) 0.001866 0.040413* 0.006318 6.396759 (-1,-19) -0.006995 0.033417* 0.006362 5.252242 (-1,-20) -0.004925 0.028492* 0.006516 4.372872 (-11,-20) - -0.011513 0.006777-1.698769 Note: The SE_CAAR and t-statistic have not been computed for the first five windows due very small number of observations (days) in these windows. *Values are significant at 5% level of significance #AAR relates to the last day in the window 5.6.3. CAAR and AAR During the 41 Days Around the Date of Announcement An attempt was also made to examine the behavior of cumulative abnormal returns during the time windows covering both the pre-announcement and post-announcement period. For this purpose, 20 windows were formed by adding one day before the announcement and one day after the announcement to the previous window. The CAAR and the t statistic for each of the windows are given in Table 5.8. 137

Table 5.8 Average Abnormal Returns Around the Announcement Date: Target Companies Window Day CAAR SE_CAAR t-statistic (-1,+1) 0.05358 - - (-2,+2) 0.06619 0.00696 9.51123 (-3,+3) 0.07278 0.00690 10.54580 (-4,+4) 0.07753 0.00671 11.56178 (-5,+5) 0.08226 0.00654 12.57736 (-6,+6) 0.08653 0.00643 13.45917 (-7,+7) 0.08661 0.00642 13.49947 (-8,+8) 0.07263 0.00629 11.55501 (-9,+9) 0.08821 0.00621 14.20132 (-10,+10) 0.08970 0.00627 14.31727 (-11,+11) 0.08292 0.00618 13.42087 (-12,+12) 0.07515 0.00620 12.11688 (-13,+13) 0.07318 0.00616 11.88372 (-14,+14) 0.07834 0.00622 12.59207 (-15,+15) 0.08229 0.00631 13.04751 (-16,+16) 0.07583 0.00631 12.02445 (-17,+17) 0.07012 0.00624 11.24314 (-18,+18) 0.06855 0.00618 11.08680 (-19,+19) 0.06317 0.00619 10.20626 (-20,+20) 0.04395 0.00615 7.14306 Note: The SE_CAAR and t-statistic have not been computed for the first window due very small number of observations (days) in this window. *Values are significant at 5% level of significance As may be observed from the above Table 5.8, CAAR for target companies was positive and statistically significant for each of the windows during the 41 day period around the date of announcement, without any exception. This is perhaps because of high positive abnormal returns in narrow windows around the date of announcement. Interestingly, CAAR is highest during the window -10, +10. After that CAAR does not exhibit any specific pattern of behavior in either direction. Thus, it may be concluded that there is some noticeable pattern in the behavior of CAAR 21 days around the date 138

of announcement, which offers opportunities for formulating profitable trading strategies. In the case target companies, positive CAAR is observed in the window (- 10,+10) and also during the narrower windows. Chart 5.1 presents the behavior of AAR during the entire 41 days period around the date of announcement. 0.03 0.025 0.02 0.015 0.01 0.005 0-0.005-0.01-0.015-0.02 Chart 5.1 AARs During the 41 Day Period: Target Companies -20-18 -16-14 -12-10 -8-6 -4-2 0 2 4 6 8 10 12 14 16 18 20 Days AAR In the above chart, two distinct windows deserve attention, the 10 day window (-6,+3) and 3 day window (1,+1). Both these windows exhibit positive CAARs. The 10 day window has a positive CAAR of more than 9% and the 3 day narrower window witnessed 5.35% CAAR. These CAAR values are very high and indicative of opportunities for formulating highly profitable trading strategies. Thus, it can concluded that the investment analyst may be able to build profitable trading strategies during the10 day window (-6,+3) and 3 day window (1,+1). 5.7. Conclusion The above analysis offers very useful conclusions about the market reaction to M&A announcement for target companies in India. On ex-post basis, individual analysis suggests that there is significant impact of M&A announcement on stock returns for more 139