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[EVENT RETURN STUDY] Mergers & Acquisitions
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1.Indian Economy- Mergers & Acquisitions
The Indian economy has undergone a major transformation and structural change
during the past decade or so as a result of economic reforms introduced by the
Government of India since 1991 in the wake of policy of economic liberalization and
globalization. In this liberalized era, size and "core competence" have become the
focus of every business enterprise. Naturally, this requires companies to grow and
expand in businesses that they understand well. Thus, leading corporate houses have
undertaken a massive restructuring exercise to create a formidable presence in their
core areas of interest. Mergers and acquisitions (M&As) is one of the most effective
methods of corporate restructuring and has, therefore, become an integral part of the
long-term business strategy of corporate.
The M&A activity has its impact on various diverse groups such as corporate
management, shareholders and investors, investment bankers, regulators, stock
markets, customers, government and taxation authorities, and society at large.
Therefore, it is not surprising that it has received considerable attention at the hands
of researchers world over. A number of studies have been carried out abroad
especially in the developed capital markets of Europe, Australia, Hong Kong, and US.These studies have largely focused on different aspects, viz., (a) the rationale of
M&As, (b) allocational and redistr ibution role of M&As, (c) effect of takeovers on
shareholders' wealth, (d) corporate financial performance, etc. Some studies have
also been carried out to predict corporate takeovers using financial ratios. M&As,
being a new phenomenon in India, has not received much attention of researchers. In
fact, no comprehensive study has been undertaken to examine various aspects
especially after the Takeover Code came into being in1997. This study has been
undertaken to fill this gap.
Until upto a couple of years back, the news that Indian companies having acquired
American-European entities was very rare. However, this scenario has taken a sudden
U turn. Nowadays, news ofIndian Companies acquiring foreign businesses are more
common than other way round.
http://trak.in/Tags/Business/2007/05/30/india%e2%80%99s-new-found-confidence-global-acquisitions/http://trak.in/Tags/Business/2007/07/02/the-indian-mergers-and-acquisitions-are-growing-exponentially/http://trak.in/Tags/Business/2007/07/02/the-indian-mergers-and-acquisitions-are-growing-exponentially/http://trak.in/Tags/Business/2007/05/30/india%e2%80%99s-new-found-confidence-global-acquisitions/8/7/2019 merger n aquisition
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Buoyant Indian Economy, extra cash with Indian corporates, Government policies and
newly found dynamism in Indian businessmen have all contributed to this new
acquisition trend. Indian companies are now aggressively looking at North American
and European markets to spread their wings and become the global players.
The Indian IT and ITES companies already have a strong presence in foreign markets;
however, other sectors are also now growing rapidly. The increasing engagement of
the Indian companies in the world markets, and particularly in the US, is not only an
indication of the maturity reached by Indian Industry but also the extent of their
participation in the overall globalization process.
The Top 10 acquisitions made by Indian companies worldwide
Acquirer Target Company Country targetedDeal value
($ ml)Industry
Tata Steel Corus Group plc UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel
Videocon Daewoo Electronics Corp. Korea 729 Electronics
Dr. Reddys Labs Betapharm Germany 597 Pharmaceutical
Suzlon Energy Hansen Group Belgium 565 Energy
HPCLKenya Petroleum
Refinery Ltd.Kenya 500 Oil and Gas
Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
http://trak.in/Tags/Business/2007/04/30/the-indian-economy-can-it-be-stopped-somehow/http://trak.in/Tags/Business/2007/04/28/indian-it-companies-flush-with-cash/http://trak.in/Tags/Business/2007/05/30/india%e2%80%99s-new-found-confidence-global-acquisitions/http://trak.in/Tags/Business/2007/06/20/vijay-mallya-kingfisher-airlines-enters-overseas-market-biggest-airbus-order/http://trak.in/Tags/Business/2007/04/28/indian-it-companies-flush-with-cash/http://trak.in/Tags/Business/2007/04/30/the-indian-economy-can-it-be-stopped-somehow/8/7/2019 merger n aquisition
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2.Mergers & Acquisitions
Meaning of Merger
A merger is a tool used by companies for the purpose of expanding their operations
often aiming at an increase of their long term profitability. There are 15 different types
of actions that a company can take when deciding to move forward using M&A.
Usually mergers occur in a consensual (occurring by mutual consent) setting where
executives from the target company help those from the purchaser in a due diligence
process to ensure that the deal is beneficial to both parties. Acquisitions can also happen
through a hostile takeover by purchasing the majority of outstanding shares of acompany in the open market against the wishes of the target's board. In the United
States, business laws vary from state to state whereby some companies have limited
protection against hostile takeovers. One form of protection against a hostile takeover is
the shareholder rights plan, otherwise known as the poison pill.
In business or economics a merger is a combination of two companies into one larger
company. Such actions are commonly voluntary and involve stock swap or cash
payment to the target. Stock swap is often used as it allows the shareholders of the two
companies to share the risk involved in the deal. A merger can resemble a takeover but
result in a new company name (often combining the names of the original companies)
and in new branding; in some cases, terming the combination a "merger" rather than an
acquisition is done purely for political or marketing reasons.
Historically, mergers have often failed to add significantly to the value of the
acquiring firm's shares. Corporate mergers may be aimed at reducing marketcompetition, cutting costs (for example, laying off employees, operating at a more
technologically efficient scale, etc.), reducing taxes, removing management, "empire
building" by the acquiring managers, or other purposes which may or may not be
consistent with public policy or public welfare. Thus they can be heavily regulated.
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Classification of Merger
Horizontal mergers take place where the two merging companies produce
similar product in the same industry.
Vertical mergersoccur when two firms, each working at different stages in the
production of the same good, combine.
Market Extension Merger and Product Extension Merger
Market Extension Merger
As per definition, market extension merger takes place between two companies thatdeal in the same products but in separate markets. The main purpose of the market
extension merger is to make sure that the merging companies can get access to abigger market and that ensures a bigger client base.
Product Extension Merger
According to definition, product extension merger takes place between two businessorganizations that deal in products that are related to each other and operate in the
same market. The product extension merger allows the merging companies to grouptogether their products and get access to a bigger set of consumers. This ensures that
they earn higher profits.
Congeneric mergers occur where two merging firms are in the same general
industry, but they have no mutual buyer/customer or supplier relationship, such
as a merger between a bank and a leasing company.
Conglomerate mergers take place when the two firms operate in different
industries.
A unique type of merger called a reverse merger is used as a way of going public
without the expense and time required by an IPO.
The contract vehicle for achieving a merger is a "merger sub".
http://en.wikipedia.org/wiki/Horizontal_integrationhttp://en.wikipedia.org/wiki/Horizontal_integrationhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Vertical_integrationhttp://en.wikipedia.org/wiki/Vertical_integrationhttp://en.wikipedia.org/w/index.php?title=Congeneric_integration&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Congeneric_integration&action=edit&redlink=1http://en.wikipedia.org/wiki/Conglomerate_%28company%29http://en.wikipedia.org/wiki/Reverse_mergerhttp://en.wikipedia.org/wiki/IPOhttp://en.wikipedia.org/wiki/IPOhttp://en.wikipedia.org/wiki/Reverse_mergerhttp://en.wikipedia.org/wiki/Conglomerate_%28company%29http://en.wikipedia.org/w/index.php?title=Congeneric_integration&action=edit&redlink=1http://en.wikipedia.org/wiki/Vertical_integrationhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Horizontal_integration8/7/2019 merger n aquisition
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Accretive mergers are those in which an acquiring company's earnings per
share (EPS) increase. An alternative way of calculating this is if a company with
a high price to earnings ratio (P/E) acquires one with a low P/E.
Dilutive mergers are the opposite of above, whereby a company's EPS
decreases. The company will be one with a low P/E acquiring one with a high
P/E.
The completion of a merger does not ensure the success of the resulting
organization; indeed, many mergers (in some industries, the majority) result in a net
loss of value due to problems. Correcting problems caused by incompatibility
whether of technology, equipment, or corporate culture diverts resources away
from new investment, and these problems may be exacerbated by inadequate
research or by concealment of losses or liabilities by one of the partners.
Overlapping subsidiaries or redundant staff may be allowed to continue, creating
inefficiency, and conversely the new management may cut too many operations or
personnel, losing expertise and disrupting employee culture. These problems are
similar to those encountered in takeovers. For the merger not to be considered a
failure, it must increase shareholder value faster than if the companies were
separate, or prevent the deterioration of shareholder value more than if the
companies were separate.
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Meaning of Acquisition
An acquisition, also known as a takeover, is the buying of one company (the
target) by another. An acquisition may be friendly or hostile. In the former case,
the companies cooperate in negotiations; in the latter case, the takeover target is
unwilling to be bought or the target's board has no prior knowledge of the offer.
Acquisition usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a larger or
longer established company and keep its name for the combined entity. This is
known as a reverse takeover.
Types of Acquisition
A company is said to have "Acquired" a company, when one company buys another
company. Acquisitions can be either:
Hostile
Friendly
In case of hostile acquisitions, the company, which is to be bought has no
information about the acquisition. The company, which would be sold is taken by
surprise.
In case of friendly acquisition, the two companies cooperate with each other and
settle matters related to acquisitions.
There are times when a much smaller company manages to take control of the
management of a bigger company but at the same time retains its name for the
combination of both the companies. This process is known as "reverse takeover".
Kinds of acquisitions:
There may be two types of acquisitions depending on the option adopted by the
buying company. In one case, the buying company may buy all the shares of the
smaller company. The other option is buying the assets of the smaller companies.
http://en.wikipedia.org/wiki/Takeover#Friendly_and_hostile_takeovershttp://en.wikipedia.org/wiki/Takeover#Friendly_and_hostile_takeovershttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Reverse_takeoverhttp://en.wikipedia.org/wiki/Reverse_takeoverhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Takeover#Friendly_and_hostile_takeovers8/7/2019 merger n aquisition
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2.1 Business Valuation
The five most common ways to evaluate a business are
Asset valuation
Historical earnings valuation
Future maintainable earnings valuation
Earnings Before Interest Taxes Depreciation and Amortization (EBITDA)
valuation
Shareholder's Discretionary Cash Flow (SDCF) valuation.
Professionals who valuate businesses generally do not use just one of these methods
but a combination of some of them, as well as possibly others that are not
mentioned above, in order to obtain a more accurate value. These values are
determined for the most part by looking at a company's balance sheet and/or income
statement and withdrawing the appropriate information. The information in the
balance sheet or income statement is obtained by one o f three accounting measures:
a Notice to Reader, a Review Engagement or an Audit.
Accurate business valuation is one of the most important aspects of M&A as
valuations like these will have a major impact on the price that a business will be
sold for. Most often this information is expressed in a Letter of Opinion of Value
(LOV) when the business is being valuated for interest's sake. There are other, more
detailed ways of expressing the value of a business. These reports generally get
more detailed and expensive as the size of a company increases, however, this is not
always the case as there are many complicated industries which require more
attention to detail, regardless of size.
Financing Valuation
Mergers are generally differentiated from acquisitions partly by the way in which
they are financed and partly by the relative size of the companies. Various
methods of financing an M&A deal exist.
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Cash: Payment by cash. Such transactions are usually termed acquisitions rather
than mergers because the shareholders of the target company are removed from
the picture and the target comes under the (indirect) control of the bidder's
shareholders alone.
A cash deal would make more sense during a downward trend in the interest rates.
Another advantage of using cash for an acquisition is that there tends to lesser
chances of EPS dilution for the acquiring company. But a caveat in using cash is
that it places constraints on the cash flow of the company.
Financing: Financing capital may be borrowed from a bank, or raised by an
issue of bonds. Alternatively, the acquirer's stock may be offered as
consideration. Acquisitions financed through debt are known as leveraged
buyouts if they take the target private, and the debt will often be moved down
onto the balance sheet of the acquired company.
Hybrid: An acquisition can involve a combination of cash and debt, or a
combination of cash and stock of the purchasing entity.
Motives behind M&A
Synergy: This refers to the fact that the combined company can often reduce
duplicate departments or operations, lowering the costs of the company relative
to the same revenue stream, thus increasing profit
Increased revenue/Increased Market Share: This motive assumes that the
company will be absorbing a major competitor and thus increase its power (by
capturing increased market share) to set prices
Cross selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up
the bank's customers for brokerage accounts. Or, a manufacturer can acquire and
sell complementary products
Economies of Scale: For example, managerial economies such as the increased
opportunity of managerial specialization. Another example are purchasing
economies due to increased order size and associated bulk-buying discounts
Taxes: A profitable company can buy a loss maker to use the target's loss as
their advantage by reducing their tax liability. In the United States and many
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other countries, rules are in place to limit the ability of profitable companies to
"shop" for loss making companies, limiting the tax motive of an acquiring
company
Geographical or other diversification: This is designed to smooth the earnings
results of a company, which over the long term smoothens the stock price of a
company, giving conservative investors more confidence in investing in the
company. However, this does not always deliver value to shareholders
Resource transfer: resources are unevenly distributed across firms (Barney,
1991) and the interaction of target and acquiring firm resources can create value
through either overcoming information asymmetry or by combining scarce
resources.
These motives are considered to not add shareholder value
Diversification: While this may hedge a company against a downturn in an
individual industry it fails to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversifying their portfolios at a
much lower cost than those associated with a merger
Manager's hubris: manager's overconfidence about expected synergies from
M&A which results in overpayment for the target company
Empire building: Managers have larger companies to manage and hence more
power.
Manager's compensation: In the past, certain executive management teams had
their payout based on the total amount of profit of the company, instead of the
profit per share, which would give the team a perverse incentive to buy
companies to increase the total profit while decreasing the profit per share
(which hurts the owners of the company, the shareholders); although some
empirical studies show that compensation is linked to profitability rather than
mere profits of the company
Vertical integration: Companies acquire part of a supply chain and benefit
from the resources. However, this does not add any value since although one
end of the supply chain may receive a product at a cheaper cost; the other end
now has lower revenue. In addition, the supplier may find more difficulty in
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a one-time market for a one-time transaction. Certain types of merger and
acquisitions transactions involve securities and may require that these
"middlemen" be securities licensed in order to be compensated. Many, but not
all, transactions use intermediaries on one or both sides. Despite best intentions,
intermediaries can operate inefficiently because of the slow and limiting nature
of having to rely heavily on telephone communications. Many phone calls fail to
contact with the intended party. Busy executives tend to be impatient when
dealing with sales calls concerning opportunities in which they have no interest.
These marketing problems typify any private negotiated markets. Due to these
problems and other problems like these, brokers who deal with small to mid-
sized companies often deal with much more strenuous conditions than other
business brokers. Mid-sized business brokers have an average life-span of only
12-18 months and usually never grow beyond 1 or 2 employees.
Complex Process
The market inefficiencies can prove detrimental for this important sector of the
economy. Beyond the intermediaries' high fees, the current process for mergers
and acquisitions has the effect of causing private companies to initially sell their
shares at a significant discount relative to what the same company might sell for
were it already publicly traded. An important and large sector of the entire
economy is held back by the difficulty in conducting corporate M&A (and also
in raising equity or debt capital). Furthermore, it is likely that since privately
held companies are so difficult to sell they are not sold as often as they might or
should be.
One part of the M&A process which can be improved significantly using
networked computers is the improved access to "data rooms" during the due
diligence process however only for larger transactions. For the purposes of
small-medium sized business, these datarooms serve no purpose and are
generally not used. Reasons for frequent failure of M&A was analyzed by
Thomas Straub in "Reasons for frequent failure in mergers and acquisitions - a
comprehensive analysis", DUV Gabler Edition, 2007.
http://en.wikipedia.org/wiki/Dataroomhttp://en.wikipedia.org/wiki/Dataroomhttp://en.wikipedia.org/wiki/Dataroom8/7/2019 merger n aquisition
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Short run factors
One of the major short run factors that sparked is the desire to keep prices high.
That is, with many firms in a market, supply of the product remains high. When
demand for the good falls, as illustrated by the classic supply and demand
model, prices are driven down. To avoid this decline in prices, firms found it
profitable to collude and manipulate supply to counter any changes in demand
for the good. This type of cooperation led to widespread horizontal integration
amongst firms of the era. Focusing on mass production allowed firms to reduce
unit costs to a much lower rate. These firms usually were capital-intensive and
had high fixed costs.
Long run factors
In the long run, due to the desire to keep costs low, it was advantageous for
firms to merge and reduce their transportation costs thus producing and
transporting from one location rather than various sites of different companies as
in the past. This resulted in shipment directly to market from this one location.
In addition, technological changes prior to the merger movement within
companies increased the efficient size of plants with capital intensive assembly
lines allowing for economies of scale. Thus improved technology and
transportation are forerunners to the M&A. In part due to competitors as
mentioned above, and in part due to the government, however, many of these
initially successful mergers were eventually dismantled. Price fixing with
competitors created a greater incentive for companies to unite and merge under
one name so that they were not competitors anymore and technically not price
fixing.
Cross border M&A
In a study conducted in 2000 by Lehman Brothers, it was found that, on average,
large M&A deals cause the domestic currency of the target corporation to appreciate
by 1% relative to the acquirer's. For every $1-billion deal, the currency of the target
corporation increased in value by 0.5%. More specifically, the report found that in
the period immediately after the deal is announced, there is generally a strong
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upward movement in the target corporation's domestic currency (relative to the
acquirer's currency). Fifty days after the announcement, the target currency is then,
on average, 1% stronger.
Due to the complicated nature of cross border M&A, the vast majority of cross
border actions have unsuccessful results. Cross border intermediation has many
more levels of complexity to it then regular intermediation seeing as corporate
governance, the power of the average employee, company regulations, political
factors customer expectations, and countries' culture are all crucial factors that could
spoil the transaction.
Merger and Acquisition Process
Procedure for merger and amalgamation is different from takeover. Mergers and
amalgamations are regulated under the provisions of the Companies Act, 1956
whereas takeovers are regulated under the SEBI Regulations.
The beginning to amalgamation may be made through common agreements between
the transferor and the transferee but mere agreement does not provide a legal cover
to the transaction unless it carries the sanction of company court for which the
procedure laid down U/s-391 of the Companies Act should be followed for giving
effect to amalgamation through the statutory instrument of the Courts Sanction.
The procedure is complex, involving not only the compromises or arrangements
between the company and its creditors or any class of them or between the company
and its members or any class of them, but it involves, safeguard of public interest
and adherence to public policy. These aspects are looked after by the Central Govt.
through Official Liquidator or Company Law Board, Department of Company
Affairs and the Court has to be satisfied of the same.
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Top Managements Commitments towards Merger and Amalgamation:
Top management defines the organizations goal and outlines the policy framework
to achieve these objectives. The organizations goal for business expansion could be
accomplished, inter alia through business combinations assimilating a target
corporate which can remove the present deficiencies in the organization and can
contribute in the required direction to accomplish the goal of business expansion
through enhanced commercial activity i.e. supply of inputs and market for out-put
product diversification, adding up new products and improved technological
process, providing new distribution channels and market segments, making
available technical personnel and experienced skilled manpower, research and
development establishments etc. Depending upon the specific need and cost
advantage with reference to creating a new set up or acquiring a well-established
set-up firm.
Search for a Merger Partner
The top management may use their own contacts with competitors in the same line
of economic activity or in the other diversified field which could be identified as
better merger partners or may use the contacts of merchant bankers, financial
consultants and other agencies in locating suitable merger partners. A number of
corporate candidates maybe short-listed and identified. Such identification should
be based on the detailed information of the merger partners collected from
published and private sources. Such information should reveal the following aspects
viz :-
i) Organizat ional history of business and promoters and capital structure
ii) Organizational goals
iii) Product, market and competitors
iv) Organizational set-up and management pattern
v) Assets profile: movable and immovable assets, land and building
vi) Manpower: skilled, un-skilled, technical personnels and detailed particulars
of management employees
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Negotiation
Top management can negotiate at a time with several identified short-listed
companies suited to be merger partner for settling terms of merger and pick-up one
of them which offers most favorable terms.
Negotiations can be had with target companies before making any acquisitional
attempt. Same drill of negotiations could be followed in the cases of merger and
amalgamation. The activity schedule for planning merger covers different aspects
like preliminary consultations with the perspective merger partner and seeking its
willingness to cooperate in investigations. There are other aspects, too, in the
activity schedule covering quantification, action plan, purpose, shape, and date of
merger, profitability and valuation, taxation aspects legal aspects and deve lopment
plan of the company after merger. The most important step at this stage of Valuation
of Shares and determination of Share Exchange Ratio.
Steps for Merger & Amalgamation
Once the merger partner has been identified and terms of merger are settled the
subsequent steps are given below:
1. Scheme of Amalgamation
The scheme of amalgamation should be prepared by the companies, which have
arrived at a consensus to merge. There is no specific form prescribed for scheme of
amalgamation but scheme should generally contain the following information :-
i) Particulars about transferee and transferor companies.
ii) Appointed date i.e. Cut-Off date from which the transferor company rest with
transferee company.
iii) Main terms of transfer of assets from transferor to transferee with power to
execute on behalf or for transferee the deed or documents being given to
transferee.
iv) Main terms of transfer liabilities from transferor to transferee covering any
conditions attached to loans/ debentures/ bonds/ other liabilities from
bank/financial institution/ trustees and listing conditions attached thereto
v) Effective date when the scheme will come into effect
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vi) Conditions as to carrying on the business activities by transferor between
appointed date and effective date.
vii) Description of happenings and consequences of the scheme coming into effect
on effective date
viii) Share capital of transferor company specifying authorized capital, issued
capital
and subscribed and paid-up capital
ix) Share capital of transferee company covering above heads
x) Description of proposed share exchange ratio, any conditions attached thereto,
any fractional share certificates to be issued, transferee companys responsibility
to obtain consent of concerned authorities for issue and allotment of shares and
listing
xi) Surrender of shares by share-holder of transferor company for exchange into
new share certificates
xii) Conditions about payment of dividend, ranking of equity shares pro-rata
dividend declaration and distribution
xiii) Status of employees of the transferor companies from effective date and the
status of the provident fund, gratuity fund, super annuity fund or any special
scheme or fund created or existing for the benefit of the employees;
xiv) Treatment on effective date of any debit balance of transferor company balance
sheet.
xv) Miscellaneous provisions covering income-tax dues, contingencies and other
accounting entries deserving attention or treatment.
2. Approval of Board of Directors for the Scheme
Respective Board of Directors for transferor and transferee companies are required
to approve the scheme of amalgamation.
3. Approval of the Scheme by Specialized Financial Institutions/ Banks/
Trustees for Debenture Holders
The Board of Directors should in fact approve the scheme only after it has been
cleared by the financial institutions/ banks, which have granted loans to these
companies or the debenture trustees to avoid any major change in the meeting of
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creditors to be convened at the instance of the Company Courts U/s-391 of the
Companies Act, 1956.
Approval of Reserve Bank of India is also needed where the scheme of
amalgamation contemplates issue of share/ payment of cash to non-resident Indians
or foreign national under the provisions of Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident Outside India) Regulations,
2000. In particular, regulation 7 of the above regulations provide for compliance of
certain conditions in the case of scheme of merger or amalgamation as approved by
the court.
4. Intimation to Stock Exchange about Proposed Amalgamation
Listing agreements entered into between company and stock exchange require the
company to communicate price-sensitive information to the stock exchange
immediately and simultaneously when released to press and other electronic media
on conclusion of Board meeting according approval to the Scheme.
5. Application to Court for Directions
The next step is to make an application U/s-39(1) to the High Court having
jurisdiction over the Registered Office of the Company. The transferor and the
transferee company should make separate applications to the High Court. The
application shall be made by a Judges Summons in Form No -33 supported by an
affidavit in Form No-34 (See Rule-82 of the Companies (Court) Rules, 1959). The
following documents should be submitted with the Judges Summons:-
i) A true copy of the Companys Memorandum and Articles ;
ii) A true copy of the Companys latest audited balance sheet ;
iii) A copy of the Board Resolution, which authorizes the Director to make the
applicat ion to the High Court.
6. High Court Directions for Members Meeting
Upon the hearing of the summons, the High Court shall give directions fixing the
date, time and venue and quorum for the members meeting and appoint an
Advocate Chairman to preside over the meeting and submit a report to the Court
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Similar directions are issued by the court for calling the meeting of creditors in case
such a request has been made in the application.
7. Approval of Registrar of High Court to Notice for Calling the Meeting of
Members/ Creditors
Pursuant to the directions of the Court, the transferor as well as the transferee
companies shall submit for approval to the Registrar of the respective High Courts
the draft notices calling the meetings of the members in Form No-36 together with
the scheme of arrangements and explanations, statement U/s-393 of the Companies
Act and Form of Proxy in Form No-37 of the Companies (Court) Rules to be sent to
members along with the said notice. Once Registrar has accorded approval to the
notice, it should be got signed by the Chairman appointed for meeting by the High
Court who shall preside over the proposed meeting of members.
8. Dispatch of Notices to Members/ Shareholders
Once the notice has been signed by the Chairman of the forthcoming meeting as
aforesaid it could be dispatched to the members under Certificate of posting at least
21 days before the date of meeting.
9. Advertisement of the Notice of Members Meetings
The court may direct the issuance of notice of the meeting of these shareholders by
advertisement. In such case Rule-74 of the Companies (Court) Rules provides that
the notice of the meeting should be advertised in; such newspaper and in such
manner as the Court might direct not less than 21 clear days before the date fixed
for the meeting. The advertisement shall be in Form No-38 appended to the
Companies (Court) Rules. The companies should submit the draft for the notice to
be published in Form No-38 in English daily together with a translation thereof in
the regional language to the Registrar of High Court for his approval. The
advertisement should be released in the newspapers after the Registrar approves the
draft.
10. Confirmation about Service of the Notice
Ensure that at least one week before the date of the meeting, the Chairman
appointed for the meeting files an Affidavit to the Court about the service of notices
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to the shareholders that the directions regarding the issue of notices and
advertisement have been duly complied with.
11. Holding the Shareholders General Meeting and Passing the Resolutions
The general meeting should be held on the appointed date. Rule-77 of the
Companies (Court) Rules prescribes that the decisions of the meeting held pursuant
to the court order should be ascertained only by taking a poll. The amalgamation
scheme should be approved by the members, by a majority in number of members
present in person or on proxy and voting on the resolution and this majority must
represent at least thus in value of the shares held by the members who vote in the
poll.
12. Filing of Resolutions of General Meeting with Registrar of Companies
Once the shareholders general meeting approves the amalgamation scheme by a
majority in number of members holding not less than in value of the equity
shares, the scheme is binding on all the members of the company. A copy of the
resolution passed by the shareholders approving the scheme of amalgamation
should be filed with the Registrar of Companies in Form No-23 appended to the
Companies (Central Governments) General Rules and Forms, 1956 within 30 days
from the date of passing the resolution.
13. Submission of Report of the Chairman of the General Meeting to Court
The chairman of the general meeting of the shareholders is required to submit to the
court within seven days from the date of the meeting a report in Form No-39,
Companies (Court) Rules, 1959 setting out therein the number of persons who
attend either personally or by proxy, and the percentage of shareholders who voted
in favor of the scheme as well as the resolution passed by the meeting.
14. Submission of Joint Petition to Court for Sanctioning the Scheme
Within seven days from the date on which the Chairman has submitted his report
about the result of the meeting to the Court, both the companies should make a joint
petition to the High Court for approving the scheme of amalgamation. This petition
is to be made in Form No-40 of Companies (Court) Rules. The court will fix a date
of hearing of the petition. The notice of the hearing should be advertised in the same
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papers in which the notice of the meeting was advertised or in such other
newspapers as the court may direct, not less than 10 days before the date fixed for
the hearing.
15. Issue of Notice to Regional Director, Company Law Board U/s-394-A
On receipt of the petition for amalgamation U/s-391 of Companies Act, 1956 the
Court will give notice of the petition to the Regional Director, Company Law Board
and will take into consideration the representations, if any, made by him.
16. Hearing of Petition & Confirmation of Scheme
Having taken up the petition by the court for hearing it will hear the objections first
and if there is no objection to the amalgamation scheme from Regional Director or
from any other person who is entitled to oppose the scheme, the court may pass an
order approving the scheme of amalgamation in; Form No-41 or Form No-42 of
Companies (Court) Rules. The court may also pass order directing that all the
property, rights and powers of the transferor company specified in the schedules
annexed to the order be transferred without further act or deed to the transferee
company and that all the liabilities and duties of the transferor company be
transferred without further act or deed.
17. Filing of Court Order with ROC by both the Companies
Both the transferor and transferee companies should obtain the Courts order
sanctioning the scheme of amalgamation and file the same with ROC with their
respective jurisdiction as required vide Sec-394(3) of the Companies Act, 1956
within 30 days after the date of the Courts Order in Form No-21 prescribed under
the (Central Governments) General Rules and Forms, 1956. The amalgamation will
be given effect to from the date on which the High Courts Order is filed with the
Registrar.
18. Transfer of the Assets & Liabilities
Section-394(2) vests power in the High Court to order for the transfer of any
property or liabilities from Transferor Company to Transferee Company. In
pursuance of and by virtue of such order such properties and liabilities of the
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transferor shall automatically stand transferred to transferee company without any
further act or deed from the date the Courts Order is filed with ROC.
19. Allotment of Shares to Shareholders of Transferor Company
Pursuant to the sanctioned scheme of amalgamation, the share-holders of the
transferor company are entitled to get shares in the transferee company in the
exchange ratio provided under the said scheme. There are three different situations
in which allotment could be given effect:-
i)Where transferor company is not a listed company, the formalities prescribed
under listing agreement do not exist and the allotment could take place without
setting the record date or giving any advance notice to shareholders except asking
them to surrender their old share certificates for exchange by the new ones ;
ii) The second situation will emerge different where Transferor Company is a listed
company. In this case, the stock exchange is to be intimated of the record date
by giving at least 42 days notice or such notice as provided in the listing
agreement.
20. Listing of the Shares at Stock Exchange
After the amalgamation is effected, the company which takes over the assets and
liabilities of the transferor company should apply to the stock exchanges where its
securities are listed, for listing the new shares allotted to the shareholders of the
transferor company.
21. Court order to be annexed to Memorandum of Transferee Company
It is the mandatory requirement vide Sec-391(4) of the Companies Act, 1956 that
after the certified copy of the Courts Order sanctioning the scheme of
amalgamation is filed with Registrar, it should be annexed to every copy of the
Memorandum issued by the transferee company. Failure to comply with
requirement renders the company and its officers liable to punishment.
22. Preservation of Books & Papers of Amalgamated Company
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Sec-396A of the Act requires that the books and papers of the amalgamated
company should be preserved and not be disposed of without prior permission of the
Central Government.
23. The Post Merger Secretarial Obligations
There are various formalities to be complied with after amalgamation of the
companies is given effect to and allotment of shares to the shareholders of the
transferor company is over. These formalities include filing of the returns with
Registrar of Companies, transfer of investments of transferor company in; the name
of the transferee, intimating banks and financial institutions, creditors and debtors
about the transfer of the transferor companys assets and liabilities in the name of
the transferee company, transfer of employees, gratuity, PF and Pension funds etc.
24. Withdrawal of the Scheme not Permissible
Once the scheme for merger has been approved by requisite majority of
shareholders and creditors, the scheme cannot be with-drawn by subsequent
meeting of shareholders by passing Resolution for withdrawal of the petition
submitted to the court U/s-391 for sanctioning the scheme.
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Different aspects of Mergers and Acquisition
Accounting Aspects of Merger
Introduction
This standard deals with accounting for amalgamations and the treatment of any
resultant goodwill or reserves. This standard is directed principally to companies
although some of its requirements also apply to financial statements of other
enterprises.
This standard does not deal with cases of acquisitions which arise when there is a
purchase by one company of the whole or part of the shares, or the whole or part of
the assets, of another company in consideration for payment in cash or by issue of
shares or other securities in the acquiring company or partly in one form and partly
in the other. The distinguishing feature of an acquisition is that the acquired
company is not dissolved and its separate ent ity continues to exist.
Definitions
The following terms are used in this statement with the meanings specified:
a) Amalgamation means an amalgamation pursuant to the provisions of the
Companies Act, 1956 or any other statute which may be applicable to
companies.
b) Transferor Company means the company which is amalgamated into another
company.
c) Transferee company means the company into which a transferor company is
amalgamated.
d) Reserve means the portion of earnings, receipts or other surplus of an enterprise
(whether capital or revenue) appropriated by the management for a general or a
specific purpose other than a provision for depreciation or diminution in the
value of assets or for a known liability.
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e) Amalgamation in the nature of merger is an amalgamation which satisfies all the
following conditions.
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
(ii)Shareholders holding not less than 90% of the face value of the equity shares of
the transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders
of the transferor company who agree to become equity shareholders of the
transferee company is discharged by the transferee company wholly by the issue
of equity shares in the transferee company, except that cash may be paid in
respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting
policies.
f) Amalgamation in the nature of purchase is an amalgamation which does not
satisfy any one or more of the conditions specified in sub-paragraph (e) above
g) Consideration for the amalgamation means the aggregate of the shares and other
securities issued and the payment made in the form of cash or other assets by the
t
transferee company to the shareholders of the transferor company.
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h) Fair value is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arms
length
transaction.
i) Pooling of interests is a method of accounting for amalgamations the object of
which
is to account for the amalgamation as if the separate businesses of the
amalgamating companies were intended to be continued by the transferee
company. Accordingly, only minimal changes are made in aggregating the
individual financial statements of the amalgamating companies.
Methods of Accounting for Amalgamations
There are two main methods of accounting for amalgamations:
1. The Pooling of Interests Method
Under the pooling of interests method, the assets, liabilities and reserves of the
transferor company are recorded by the transferee company at their existing
carrying amounts.
If, at the time of the amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies is adopted
following the amalgamation. The effects on the financial statements of any changes
in accounting policies are reported in accordance with Accounting Standard (AS) 5,
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies.
2. The Purchase Method
Under the purchase method, the transferee company accounts for the
amalgamation either by incorporating the assets and liabilities at their existing
carrying amounts or by allocating the consideration to individual identifiable
assets and liabilities of the transferor company on the basis of their fair values at
the date of amalgamation. The identifiable assets and liabilities may include
assets and liabilities not recorded in the financial statements of the transferor
company.
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Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions of the transferee
company. For example, the transferee company may have a specialized use for an
asset, which is not available to other potential buyers. The transferee company may
intend to effect changes in the activities of the transferor company which necessitate
the creation of specific provisions for the expected costs, e.g. planned employee
termination and plant relocation costs.
Treatment of Goodwill Arising on Amalgamation
Goodwill arising on amalgamation represents a payment made in anticipation of
future income and it is appropriate to treat it as an asset to be amortized to income
on a systematic basis over its useful life. Due to the nature of goodwill, it is
frequently difficult to estimate its useful life with reasonable certainty. Such
estimation is, therefore, made on a prudent basis. Accordingly, it is considered
appropriate to amortize goodwill over a period not exceeding five years unless a
somewhat longer period can be justified.
Factors which may be considered in estimating the useful life of goodwill arising on
amalgamation include:
(a) The foreseeable life of the business or industry;
(b) The effects of product obsolescence, changes in demand and other economic
factors;
(c) The service life expectancies of key individuals or groups of employees;
(d) Expected actions by competitors or potential competitors; and
(e) Legal, regulatory or contractual provisions affecting the useful life.
Balance of Profit and Loss Account
In the case of an amalgamation in the nature of merger, the balance of the Profit
and Loss Account appearing in the financial statements of the transferor company is
aggregated with the corresponding balance appearing in the financial statements of
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the transferee company. Alternatively, it is transferred to the General Reserve, if
any.
In the case of an amalgamation in the nature of purchase, the balance of the Profit
and Loss Account appearing in the financial statements of the transferor company,
whether debit or credit, loses its identity.
Amalgamation after the Balance Sheet Date
When an amalgamation is effected after the balance sheet date but before the
issuance of the financial statements of either party to the amalgamation, disclosure
is made in accordance with AS 4, Contingencies and Events Occurring After the
Balance Sheet Date, but the amalgamation is not incorporated in the financial
statements. In certain circumstances, the amalgamation may also provide additional
information affecting the financial statements themselves, for instance, by allowing
the going concern assumption to be maintained.
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Tax aspect
An amalgamation involves the merger of one or more company into a existing
company of merger of two or more company into a new company form specifically
for this purpose. The merging companies are cold amalgamating companies and the
merged company is called amalgamated company. The amalgamated company is
entitling to various tax benefits, if the following condition is fulfilled.
1. All the properties and liabilities of amalgamating company immediately before
the
amalgamation become the properties and liabilities of amalgamated company by
the
virtue of amalgamation
2. Shareholders holding more than 90% in value of the shares in the amalgamating
company become shareholders of the amalgamated company by the virtue of the
amalgamation.
Tax concessions are granted to the amalgamated company only if the amalgamating
company is an Indian company. Following deduction to the extend available to the
amalgamating company and remaining unabsorbed or unfulfilled will be available
to the amalgamating company
1. capital expenditure on scientific research
2. expenditure on acquisition of patent right or copyright, know-how
3. expenditure on obtaining license to operate telecommunication service
4. amortization of preliminary expenses
5. carry forward of losses and unabsorbed depreciation
Subject to certain circumstances transfer of capital assets by the amalgamating
company to the amalgamated company neither is nor treated as transfer for the
purpose of computing capital gains.
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Of the above benefits the most important is the one relenting to the carry forward of
the losses and unabsorbed depreciation of the amalgamating company. Generally,
accumulate losses and unabsorbed depreciation of an assessee cannot be carried and
set of by another assessee. However, as an acceptation, carry forward and setoff is
available in case of amalgamation, subject to the fulfillment of following condition.
1. The amalgamating company owns an industrial undertaking or a ship.
2. The amalgamated company continues to hold at least 3/4 th of the book value of
the
fixed asset of the amalgamating company for the period of 5 years from the
effective date of amalgamation.
3. The amalgamated company continues the business of the amalgamating
company
for a minimum period of 5 years.
4. The amalgamated company achieves a level of production at least 50% of
installed capacity of the said undertaking before the end of 4 years from the date
of amalgamation and continuous to maintain the said minimum level of
production till the end of 5 years from the date of amalgamation.
On the fulfillment of above condition, the unabsorbed business losses and unabsorbed
depreciation of the amalgamated company are deemed to be the loss or depreciation
of the amalgamated company for the year of amalgamation thus resulting in a fresh
lease of 8 years for set off or carry forward.
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Legal Aspect
Companies Act, 1956, Chapter V
The Companies Act, 1956 has provided for a set of provisions specially dealing
with
Amalgamation of companies, to facilitate the transactions. The statutory provisions
relating to Merger and Amalgamations are contained in Sections 390 to 396A of the
Companies Act, 1956.Sections 390 to 396 of the Companies Act, 1956 govern
Rearrangements including Mergers, Amalgamations and Demergers.
Section 390
This section includes interpretation of Sections 391 and 393. Company means any
company liable to be wound up-arrangement includes a reorganization of the share
capital of the company by the consolidation of shares of different classes or by
division into or by both methods-
Section 391
This section about power to compromise or make arrangements with creditors and
members
1. Where a compromise or arrangement is proposed
-between a company and creditors/any class or member/any class
-the court may on application, order a meeting of in such manner as the court
directs
2. If majority in number representing 3/4th in value of creditors/members present
and voting either in person or by proxy[where allowed]agree and if sanctioned
by court, shall be binding on all members/creditors and company/ liquidator/
contributories.
3. No effect to court order till the time a certified copy of order is filed with the
Registrar of Companies.
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4. A copy of order of the Court to be annexed to every copy of Memorandum of
Association.
5. Default is punishable
6. Stay of suit or proceedings
Section 392
These details about the Power of High Court to enforce compromises and
arrangements
1. Court has the power to supervise and gives directions,
2. If court is satisfied that scheme is not workable; it can order winding up of the
company.
Section 393
According to this section information should be provided as to compromises or
arrangements to the creditors and members.
This section covers the procedures to be followed and the manner in which
information is to be given to the members and creditors.
1. Explanatory Statement with every notice setting forth terms of compromise and
directors' interest-
2. Trustees interest to be disclosed.
3. Statement setting terms and contract to be furnished to members.
Section 394
This includes provisions for facilitating reconstruction and amalgamation of
companies.
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1. when an application is made u/s 391 for compromise or arrangement and it is
shown to the court that[a] compromise or arrangement is proposed for the
purpose of a scheme of reconstruction of any company or companies or the
amalgamation of any two or more companies and
2. under scheme whole or any part of undertaking, property or liabilities of any
company concerned in the scheme [ transferor co] is to be transferred to another
co.[transferee co.], court may by order provide for transfer allotment
continuation of legal proceeding dissolution provision for dissenting
shareholders incidental matters
Section 394A
According to this section notice to be given to Central Government for applications
under section 391 and 394.
Section 395
Power and duty to acquire shares of shareholders dissenting from scheme or
contract approved by majority
Section 396
Power of Central Government to provide for amalgamation of companies in national
interest.
Section 396A
Preservation of books and papers of amalgamated company
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Objectives of the study:
Primary Objective
To explore the insights of a corporate event named Amalgamation which is a major
event by itself and it drags lot of attention and results into many drastic changes in
market valuations of a firm.
Secondary Objectives:
To study the impact ofAmalgamation on price and volume before and after
it takes place.
To verify existence of the abnormality in price and volume of the share as
announcement ofMergers & Acquisition.
To analyze the bearing of such abnormality (if it does exists) on the Market
Capitalization and Volumes traded on the stock market a month before and a
month after the Amalgamation takes place for all the scripts under study.
To measure the cumulative impact of Amalgamation event and try to
conceive a general trend based on it.
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Time-Frame of Data Collection:
In order to check the long run and short run effect of the amalgamation following
different time frames have been devised:
NO. Time Period Time Frame
1. 30 days before source date to 1 day before source
date
SD-30 to SD-1
2. 10 days before source date to 1 day before source
date
SD-10 to SD-1
3. The source date SD4. 1 day after source date to 1 day before effective
date
SD+1 to ED-1
5. The effective date ED
6. 1 day after effective date to 10 days after the
effective date
ED+1 to ED+10
7. 1 day after the effective date to 30 days after the
effective date
ED+1 to ED+30
The formulation of the time-frame is same for price and volume effect that we have
studied. The days are counted not as trading days but by normal days (i.e including
closed days on stock market), hence it might be possible that there are different
numbers of trading days for two firms in the time-frame.
Type of Research:
Causal Research
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Data and Sample
The study is constrained to the amalgamation announcements during the years 2007 to
2009. The data have been collected for all publicly listed companies who announced
their amalgamation plans in this specific time period. Out of that data 30 companies
have been selected. Those 30 companies are further bifurcated into 10 sectors. The
data for the companies is collected from Capitaline and Prowess Software. The stock
exchange considered as the market is the Bombay Stock Exchange of India Ltd. All
the data for prices, volumes and indices of the companies is collected from the
website of the Bombay Stock Exchange of India Ltd. (www.bseindia.com).
The following criteria have been considered to select the merger & acquisition
announcement as an eligible one for sample:
The amalgamation source date is the date on which the stock exchange that is
Bombay Stock Exchange of India Ltd. is informed that the mergers &
acquisitions are approved by the Board of Directors.
The closing price for days of time-frame decided for a particular firm is
according to what is available on the website of Bombay Stock Exchange of
India Ltd.
The indices taken for the study of companies is BSE-500.
Type of Sampling: Simple Random Sampling
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Research Methodology
In this part we will explain you how we have calculated the abnormal return using the
excel worksheet from the data that we got from the www.bseindia.com. We will also
explain you how to read each and every data and information that we collected and
mentioned in the report. Following are the steps:
Steps to find out Abnormal Price Effect
A.Collect data from bseindia.com and send it to Excel worksheet
As we mentioned earlier, we collected daily share price data from bseindia.com and
sent to excel worksheet. The above picture of excel worksheet represents the type of
share price data which is collected for every individual firms. The data that we have
collected include daily share prices, No. of shares, No.of trades etc. which is required
to do analysis. The data is collected for all firms as per the time-frame decided earlier.
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As we have taken BSE-500 indices as base, we also collected daily indices for the
specific years required in analysis.
B.Find out daily script return
After collecting data, process of analyzing the data starts. Here, we need to find out
daily script return of each day. It is difference between two consecutive days closing
price divided by the first days closing price. We can find out easily by seeing the
above picture. The script return 1.32% is difference between closing price of two
consecutive days i.e. 4th and 5thJune 2008 divided by the 4th Junes closing price.
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C.Find out daily market return
To find out daily market return we used the same formula as we have used in finding
out daily script return. Instead of closing price, we have taken BSE 500 indices
closing value. As we can see in above picture, we found out the BSE-500 return by
taking previous days closing as a base. The return that we found out by the formula
mentioned was in terms of numbers but we turned it into percentage to make
meaningful interpretation.
D.Find out the regression between script return and market return
After finding out the daily script return and market return for the event period, the
next step is to find out the regression between script and market return. To find out
the regression we selected the period of 3 months before the source date of the merger
or acquisition to 1 month before the source date of the Amalgamation (SD-90 to SD-
30). This is because we assume that most of the abnormality in trading can start at the
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max one month before the amalgamation announcement due to some insider leakage
of information, before that period script tends to react in normal manner. So in my
research that period would be the standard normal period which could be used to find
out expected return.
As we can see in this window the X range indicate BSE 500% market return for the
above mentioned period and Y range indicate script return for the above mentioned
period. Then using the MS Excel Regression analysis tool (which is in the Data menu)
we found out the regression analysis chart which is shown below. [To get the
regression tool go to toolbar, in that go to more commands and select Add-Ins. There
we need to select Analysis Tool Pack which gets installed automatically. Then again
when we go to Data menu, we will find option of Data Analysis. In that, we will find
option of regression.]
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Once we feed data in the above model we find out the summary output as mentioned
in the above picture. From the summary that we got, there are three things important
for my research. They are shown here i.e. R-Square, Alpha and Beta. The explanation
of the each of the terms and how to read the data is given below.
R-square:
The R-squared value shows how reliable the dependent variable on independent
variable is. It varies between zero and one. An R-squared value of one indicates
perfect correlation with the index. The higher the R-square, the better correlation
exists between the script return and market return. So that leads to some of good
decision making and helps in proper judgment and interpretation. Generally R-square
of more than 0.50 is considered to be good.
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Suppose we know that a is 3 and b is 2. Let us determine what X would be for an
Y equal to 5. When awe substitute the values of a, b and X in the above equation we
find the corresponding value of X to be 13. As mentioned in the above regression line
we found out the expected return for the event period (AD-30 to ED+30). The
formula used can be seen in this above picture of excel worksheet.
F. Find out the Abnormal Return
The abnormal return for a given day can be found out by subtracting expected return
for a day (which is found by using regression line as shown above) from the actual
return for a day (which is found out in step B). This picture represents the same thing.
Positive abnormal return indicate that how much positive effect is generated by the
event among the investors, in the same way negative abnormal return indicate clearly
the opposite scenario for the script. As we can see in this picture the abnormal return
for 5-June-08 is -0.02% because the actual return on the script is 1.32% which is
marginally lower than expected return of 1.34% for that day. This return is for only
one day. The real effect of such event can be seen by taking broader view and seeingcumulative effect through a particular period.
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G.Find out Cumulative Abnormal Return
As mentioned above, to study the long term and short term effect of the event, we
have divided the event period in different windows. So, to check the cumulative effect
of the abnormal return in a given time window can be found out by calculating
cumulative abnormal return for that period.
So, we have found out the
cumulative abnormal return for
each time window by using the
formula which can be seen in theformula bar shown in the picture
of worksheet. The detail of
cumulative abnormal return for
each script is shown in the next
chapter.
H.Find out Cumulative Abnormal Return for a given Time Window
From the picture of worksheet shown below we can see how to find out cumulative
abnormal return for a given time window. As we can see in window SD-30 to SD-1,
the cumulative abnormal return is -0.07% , so there is negative abnormality in return
can be seen one month before the amalgamation was announced but we can see in
other window SD-10 to SD-1 that the cumulative abnormal return has become
positive i.e. 2.40% which indicates some kind of leakage in information must be done
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before the amalgamation was actually announced. In the same we can observe
cumulative abnormal return (CAR) for different window.
In order to draw overall inferences for the event of interest, the abnormal return
observations are aggregated along two dimensions-through times and across
securities. The following measures of abnormal performance are used:
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Cumulative Abnormal Return (CAR):cumulative sum of stock Is prediction
error (abnormal returns) over the window (t1,t2)
CARi(t1,t2)=1/T = ARij
Average Abnormal Return (AAR): stock is cumulative abnormal return divided
by the number of days in the window (t1,t2)
AARi (t1,t2)= CARi (t1,t2) / ni (t1,t2)
Mean Cumulative Abnormal Return (MCAR): average of the cumulative
abnormal returns across observations (firms), it is a measure of the abnormal
performance over the event period.
MCAR (t1, t2) = 1/N = CARi (t1, t2)
Mean Average Abnormal Return (MAAR): sampleaverage of the cumulative
abnormal returns sample average of firm AARs. This measure of abnormal
performance takes into account the fact that the number of days in that window
(t1,t2) may be different across firms and therefore gives a greater weight to the
ARs o f firms for which this window is shorter. On the contrary, MCAR gives same
weight to every ARs. This implies that MAAR is more powerful when the
abnormal behaviour of returns is concentrated in short window, while MCAR is
more powerful in detecting abnormal performance over long window.
MAAR (t1, t2) =1/N = AARi (t1, t2)
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Steps to find out Abnormal Volume Effect
A.Find out Average Daily Volume
We found out the abnormal volume trading by using simple average and deviation of
actual volume from the average volume. So to find out abnormal volume the very first
step is to find out average volume. As we assume that there is normal trading takes
place from the 3 months before the announcement date to the 1 month before the
announcement date. So we took the average of that period using simple average
formula as can be seen in this data sheet. The average we get is the daily average
volume and it becomes the benchmark for our study and we can compare the actual
volume with this average volume.
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B.Find out Abnormal Volume
To find out abnormal volume trading we subtract average volume from the total
volume for a day given. The abnormal volume can be positive of negative. But in real
life the volume traded cant be negative. Here negative abnormal volume indicates
how much less volume trading takes place in comparison to expected volume traded.
C.Find out Cumulative Abnormal Volume
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As we have found in cumulative price effect in the same way we can found out the
cumulative volume traded for a given time period. This sheet represents the same
thing. Cumulative abnormal volume is useful as it indicate how much abnormality in
volume can be seen in given window or time period.
D.Find out Cumulative Abnormal Volume for a given Window
As already explain in the price effect, in the same way cumulative abnormal volume
for a given window can be found out using the above mentioned formula. As we can
see that there is huge abnormal volume trading can be seen on announcement date and
dividend date.
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4.1 Introduction
In finance, the efficient-market hypothesis (EMH) asserts that financial markets are
"informationally efficient". The weak version of EMH suppose that prices on traded
assets (e.g., stocks, bonds, or property) already reflect all past publicly available
information. The semi-strong version supposes that prices reflect all publicly
available information and instantly change to reflect new information. The strong
version supposes that market reflects even hidden/inside information. There is some
disputed evidence to suggest that the weak and semi-strong versions are valid while
there is powerful evidence against the strong version. Therefore, according to theory,
it is improbable to consistently outperform the market by using any information thatthe market already has, except through inside trading. Information or news in the
EMH is defined as anything that may affect prices that is unknowable in the present
and thus appears randomly in the future. The hypothesis has been attacked by critics
who blame the belief in rational markets for much of the financial crisis of 2007
2010, with noted financial journalist Roger Lowenstein declaring "The upside of the
current Great Recession is that it could drive a stake through the heart of the academic
nostrum known as the efficient-market hypothesis."
The efficient-market hypothesis was developed by Professor Eugene Fama at the
University of Chicago Booth School of Business as an academic concept of study
through his published Ph.D. thesis in the early 1960s at the same school. It was widely
accepted up until the 1990s, when behavioral finance economists, who were a fringe
element, became mainstream. Empirical analyses have consistently found problems
with the efficient-market hypothesis, the most consistent being that stocks with low
price to earnings (and similarly, low price to cash-flow or book value) outperform
other stocks. Alternative theories have proposed that cognitive biases cause these
inefficiencies, leading investors to purchase overpriced growth stocks rather than
value stocks. Although the efficient-market hypothesis has become controversial
because substantial and lasting inefficiencies are observed, Beechey et al. (2000)
consider that it remains a worthwhile starting point.
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4.2 The Efficient Market Hypothesis
When the term efficient market was introduced into the economics literature thirty
years ago, it was defined as a market which adjusts rapidly to new information
(Fama et al 1969).It soon became clear, however, that while rapid adjustment to new
information is an important element of an efficient market, it is not the only one. A
more modern definition is that asset prices in an efficient market fully reflect all
available information (Fama 1991). This implies that the market processes
information rationally, in the sense that relevant information is not ignored, and
systematic errors are not made. As a consequence, prices are always at levels
consistent with fundamentals. The words in this definition have been chosen
carefully, but they nonetheless mask some of the subtleties inherent in defining an
efficient asset market. For one thing, this is a strong version of the hypothesis that
could only be literally true if all available information was costless to obta in. If
information was instead costly, there must be a financial incentive to obtain it. But
there would not be a financial incentive if the information was already fully
reflected in asset prices (Grossman and Stiglitz 1980). A weaker, but economically
more realistic, version of the hypothesis is therefore that prices reflect information up
to the point where the marginal benefits of acting on the information (the expected
profits to be made) do not exceed the marginal costs of collecting it (Jensen 1978).
Secondly, what does it mean to say that prices are consistent with fundamentals? We
must have a model to provide a link from economic fundamentals to asset prices.
While there are candidate models in all asset markets that provide this link, no-one is
confident that these models fully capture the link in an empirically convincing way.
This is important since empirical tests of market efficiency especially those that
examine asset price returns over extended periods of time are necessarily joint tests
of market efficiency and a particular asset-price model.When the joint hypothesis is
rejected, as it often is, it is logically possible that this is a consequence of deficiencies
in the particular asset-price model rather than inthe efficient market hypothesis. This
is the bad model problem (Fama 1991).
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Finally, a comment about the word efficient. It appears that the term was originally
chosen partly because it provides a link with the broader economic concept of
efficiency in resource allocation. Thus, Fama began his 1970 review of the efficient
market hypothesis (specifically applied to the stockmarket):
The primary role of the capital [stock] market is allocation of ownership of
theeconomys capitalstock. In general terms, the ideal is a market in which
pricesprovide accurate signals for resource allocation: that is, a market in which firms
can make production-investment decisions, and investors can choose among the
securities that represent ownership of firms activities under the assumption that
securities prices at any time fully reflect all available information.The link between
an asset market that efficiently reflects available information (atleast up to the point
consistent with the cost of collecting the information) and its role in efficient resource
allocation may seem natural enough. Further analysis has made it clear, however, that
an informationally efficient asset market need not generate allocative or production
efficiency in the economy more generally. The two concepts are distinct for reasons to
do with the incompleteness of markets and the information-revealing role of prices
when information is costly, and therefore valuable (Stiglitz 1981).
4.3 Predictions of Efficient Market Hypothesis
The efficient market hypothesis yields a number of interesting and testable predictions
about the behaviour of financial asset prices and returns. Consequently, a vast amount
of empirical research has been devoted to testing whether financial markets are
efficient. While the bad model problem plagues some of this research, it is possible
to draw important conclusions about the informational efficiency of financial markets
from the existing body of empirical research. This section presents a selective survey
of the evidence. Our conclusions are summarised in the table and explained in more
detail in the pages that follow.
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1.BANCO PRODUCTS (INDIA) LTD.
Abnormal Return (Price): (In Percentage)
SD-30to SD-1
SD-10to SD-1 SD
SD+1 toED-1 ED
ED+1 toED+10
ED+1 toED+30
MeanDaily AB.
Return
Cum.ABReturn 60.02% 8.21% 2.37% 608.22% 3.40% 14.22% 86.30% 1.53%
0.00%
100.00%
200.00%
300.00%
400.00%
500.00%
600.00%
700.00%
SD-30
TO SD-
01
SD-10
TO SD-1
SD SD+1-
ED-1
ED ED+1-
ED+10
ED+1-
ED+30
AB.Return60.02% 8.21% 2.37% 608.22% 3.40% 14.22% 86.30%
60.02%
8.21% 2.37%
608.22%
3.40% 14.22%
86.30%%Cum.ABReturn
Time Period
Banco Products (India) Ltd.
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Interpretation:
Here we can see that before the amalgamation announced there was not much good
return but after the source date it started to become more positive. Here we can see in
the above chart that the l