M&A AND VALUE CREATION

ABSTRACT

The phrase mergers and acquisitions refers to the aspect of corporate strategy, corporate
finance and management dealing with the buying, selling and combining of different
companies that can aid, finance, or help a growing company in a given industry grow rapidly
without having to create another business entity. The primary aim for which any business is
set up is to create value. Value creation can have multiple definitions for owners or
shareholders and for other stakeholders.

The corporate sector in India has seen a considerable growth of mergers and acquisitions
since the 1990’s & it’s a business strategy today for Indian corporate. The two main
objectives behind any Merger & Acquisition (Hereinafter as M&A) transaction, for corporate
were found to be:

(i) Improving revenues and profitability; and

(ii) Faster growth in scale and quicker time to market.

The dynamics involved in the mixture process gives rise to different kinds of uncertainty and
ambiguity in the process. Human resource responses arise from three factors. First, intense
feeling of “we versus they” in the organization: these results in distrust, misunderstanding
and poor organization. Secondly, there are tensions and hostility towards the acquiring
company. Thirdly, anxieties on account of the effect it has on career plans through transfers,
job loss, relocation, and loss of individual influence and culture clashes arise when dissimilar
cultures come into contact with each other. The moments of cultural clashes are considered
by employee stress; distrust on the part of members of one firm towards the members of other
firm and negative attitudes towards each other. The negative attitudes reduce the commitment
of members to successful integration of the organisations and the extent to which they are
willing to cooperate with the other organization. When merger/acquisition takes place, it
affects the values and goals of the new organisation, due to which employees are not able to
identify and involve themselves, affecting the individual and organisational commitment. So
for a proper M&A which is to be successful then the value creation will take place a major
role. The researcher will give a clear analysis of various methods of value creation and its
importance, characteristics in further research of the project.
 LITERATURE REVIEW

Egl Duksait and Rima Tamosiunien (2009)1 described the most common motives for
companies’ decision to participate in mergers and acquisitions transactions. The reason is
growth, synergy, access to intangible assets, diversification, horizontal and vertical
integration and so on arises from the primary company’s motive to grow. Most of the
motivations for mergers and acquisitions feature serve as means of reshaping competitive
advantage within their respective industries. However, it may be that some of the motives
identified affect some industries more than others, and in that sense they can be expected to
be associated with a greater intensity of mergers and acquisitions in certain sectors rather than
others.

Julie Lei Zhu (2011)2 developed a new measure for shareholder value creation to assess the
efficiency of acquiring firms in utilizing capital before mergers and acquisitions (M&As) and
links this measure to acquirers’ post-acquisition performance. His measure, constructed
before the M&A transaction, (a) predicts both the operating and long-run abnormal stock
performance of merged firms after the acquisitions and (b) hedge portfolios based on the
measure generate substantial abnormal returns. Overall, the results indicated that investors do
not fully recognize how efficient acquirers have been in utilizing capital before M&A’s and
that incorporating the new value creation measure into the decision process of large-scale
M&As can help protect shareholder wealth.

Annalisa Caruso and Fabrizio Palmucci3 analysed the market reaction to M&A in the
banking sector, particularly interesting because of the higher complexity of corporate
governance and the importance that the M&A activity has had in recent years in Europe,
especially in Italy. In this research they performed an event study on the Italian market (in the
period 1994-2003) with two main goals: first they observe if and when there is a positive
value creation, and when private benefits of control represent one of the drivers of the
operations; secondly investigated the determinants of their results, looking at the
characteristics of the banks, regulation, the role of minority shareholders and that of the Bank
of Italy.
1
Duksait, E., & Tamosiunien, R. (2006). MOKSLAS – LIETUVOS ATEITIS SCIENCE – FUTURE OF
LITHUANIA WHY COMPANIES DECIDE TO PARTICIPATE IN MERGERS AND, 2341, 21–25.
2
Zhu, J. L. (n.d.). A New Measure for Shareholder Value Creation and the Performance, (November 2011).
3
Caruso, A., & Palmucci, F. (n.d.). No Title, 1.- Measuring value creation in bank mergers and acquisitions.