Impact of Corporate Restructuring through Mergers & Demergers on Valuation of Companies : A Study of Indian Corporate Sector

Abstract

This paper attempts to analyse the impact of corporate restructuring decisions on the financial performance, market performance and economic value of a company. Any corporate action would be termed as successful if it has facilitated the company to improve its performance on various parameters. Financial performance reflects the financial health of the company and the study observes the comparison between the financial health of the company before and after the corporate restructuring decision. This enables to analyse if the financial health of the company has improved or declined as a result of the corporate action. In addition to the impact on financial performance, the study also analyse the impact of corporate restructuring decisions on the stock prices of the company. It is studied as to how the announcement of corporate restructuring decisions impacts the share prices of the company and thereby affecting the shareholder wealth. It is also studied that during which period the announcement impacts the share prices significantly thereby affecting the shareholder wealth. Also the economic value added by the corporate action is a significant parameter to evaluate the impact of a corporate action on the company’s overall performance. The study also examines whether the corporate action helps to add any economic value to the company or not. Design/Methodology/Approach: Two important corporate restructuring decisions are considered and their impact on the performance of the companies is analysed. Mergers & Acquisitions and demergers being the vital strategic corporate decisions have been considered and we have analysed their impact on the company’s performance. A sample of 91 Indian companies, which announced mergers during 2009-10 to 2011-12, has been selected. Similarly, another sample of 60 companies is chosen which announced demerger of one or more of their divisions during the same period. The financial performance is measured on seven variables divided into three categoriesprofitability, liquidity and solvency. The financial performance of five years’ premerger/ demerger is compared with the financial performance of five years’ postmerger/ demerger. The similar comparison is done for one year & three years pre and postmerger/ demerger. The seven variables pre and post-merger/demerger are compared using paired sample ‘t’ test. Wilcoxon signed rank test is performed to further validate the results of ‘t’ test. For analysing the impact of merger or demerger announcement, the event study methodology is used with an event window period of -20 to +20. Estimation window of 256 (- 276, -20) days is considered in the study. BSE 500 is used as a market index. The value created by merger or demerger is looked at by analysing the Economic Value Added (EVA) of the company before and after the merger or demerger. The EVA five years’ pre-merger/demerger is compared with five years’ post-merger/demerger. A similar comparison is done for one year & three years pre and post-merger/demerger. EVA is compared using paired sample ‘t’ test. Wilcoxon signed rank test is performed to further validate the results of ‘t’ test. Findings: It is found that both the corporate events, mergers & demergers have a significant positive impact on the financial performance of the acquiring company and parent company respectively in five years after the event. However, we found that merger or demerger announcement has no significant impact on the stock returns. Stock prices of acquiring and parent companies do not show any significant movement during event window period. In case of mergers, the EVA of the acquiring company shows significant improvement within a period of three years. In case of demergers, due to the decrease in WACC, the EVA of the parent company improves within three years of demerger. This clearly states that merger and demerger are long term strategies and are aimed to give the desired results in long term only. 6 However, both the strategies are being applied successfully by the Indian companies and giving significantly positive results. Limitations of the study: Our study has taken into account only the listed companies for the comparison of financial performance and EVA also. This is done because we wanted to use the same data set for all three comparisons (Financial performance, Market performance and EVA). Also the availability of data for non- listed companies is a challenge. Secondly Stock prices during the event window period may get impacted by any macroeconomic factor also which is not captured in our study. Lastly, 5 years is a long duration during which financial performance may also get impacted due to reasons other than the merger/demerger. Originality/Value: This study provides the first comprehensive analysis of the impact of Indian mergers & demergers on the value of the company.