Impact Of Merger Announcements On Stock Price Finance Essay
Corporate mergers and acquisitions have gathered a lots of attentiveness from the corporate world, the public as well as the academic world. M&A activities have increased in the recent years with the objectives to grow bigger and achieve higher earnings. However, the question arises whether and under what conditions they have really been able to achieve these objectives. (Rieck and Doan, 2009)
The fundamental objective of enhancing shareholders' wealth by mergers and acquisition has been a continued attraction amongst business leaders rather than relying on internal growth alone. A company has several choices when it come to growth strategies. One option is to grow organically by increasing sales and revenue. Alternative way for growing inorganically is strategic alliances, joint ventures and franchising. Another inorganic example of how a company can grow is to merge and acquire (Sherman, 2005). According to Sudarsanam (1995), mergers and acquisitions are mainly about growth. Organic or internal growth is most often a slow process while growth trough mergers and acquisitions will increase the growth process. M&A allows the instant access to new markets, technology so that company can perform more efficiently.
There are several possible aims or reasons why a company chooses to grow through a merger and acquisition. According to DePhamphilis (2005) and Gaughan (2002) as cited in Thunberg et al. (2008), the most obvious motive is to create synergy but other motives are diversification, improved management, market power or tax motives. Similarly Ross et al. (2002) states, Mergers and acquisitions often referred to as M&A is also a tool for expanding ones business or play around different laws or regulations such as tax laws or monopoly regulations. According to Johnson and Scholes (1997), mergers and acquisitions are a fast way of entering new areas of markets or products. It's a easiest way to gain competence or resources that the company is missing. Market knowledge and market monopoly are also major cause to why companies choose M&As as way to international development. According to Child J. et al. (2001) as cited in Got and Sanz (2002), Globalisation has seen an increase in mergers and acquisitions in the recent years. it's a key feature of the new competitive landscape within which the mergers and acquisitions frenzy is taking place. Nowadays we observe the rapidly growing trend of cross-border mergers and acquisitions which is associated with a growing convergence in economic systems, culture and management practices. With the increase in competitive environment, the pressure to find effective routes to growth have increased. The corporate mind set is normally fixed for continual growth, rather than for selective growth, coupled with an ongoing review of disinvestment opportunities (Grundy, 2003.) Similar view by Sudarsanam (2003) as cited in Stalsted and Eriksson (2006), increasing competition on today's global markets, many companies choose to merge with one another to be able to survive internationally. however regardless of the industry in the case of merger, the shareholders of target firm earns abnormal returns while the shareholders of the bidding firm earns abnormal returns of only few percent, or even zero or negative returns.
According to Habeck et al. (2000), although synergy is one motive behind M&A, more literature on merger and acquisition demolish value instead of creating it. This makes this subject challenging to examine, particularly the post-merger stage since the integration process in this stage has been pointed out to be the most dangerous, when creating synergy, but also the most important in order to implement M&A successfully. (Habeck et al. 2000; Shaver 2006)
Many researcher engaged in mergers and acquisitions have expressed their deep doubt about to the fundamental rational for undertaking M&A transactions by arguing that there would be far fever such events if shareholder value creation was their true aim. They have also collected huge number of empirical evidence which at very least raises serious doubts as to the likelihood that generate value for the acquirer (Sudarsanam, 2003)
Though the shareholders wealth maximisation is the final motive for undertaking M&A, the results of many empirical studies reveal that mergers and acquisitions consistently benefit the target company's shareholders but not the acquirer company shareholders. On an average, stock prices of acquiring firm likely to reduce when mergers are announced, secondly the profitability of acquired company is also lower after the M&A in compare to non-merging firms. (indianmba.com)
Early theoretical and empirical research on the success of merger attempt by Walkling, 1985; Samuelson and Rosenthal, 1986; Hirshleifer and Titman, 1990; finds, "the bid premium, the acquirer's ownership of the target prior to the actual acquisition offer (i.e., acquirer's toehold), and target management's opposition are important factors in predicting the acquisition deal outcome. (as cited in Bino at el. 2004). According to Indiana University's Kesner as cited in the free library.com, "Lots of deals have been done where the acquirers paid too much. If you pay too much, you may not be able to dig yourself out later. Reasonableness is a key component." However Lenz (2008) argues that the clear picture of the relationship between the takeover premium and the required return of synergy in the future can avoid some irrational decisions.
A review in JOURNAL OF PROPERTY MANAGEMENT as cited in interlinkbusiness.com reveals, "Cultural integration is ignored in the majority of business combinations. This is a major reason why 60 percent to 80 percent of all business combinations undergo a slow, painful demise." Similarly study from the Financial Reporting Council as cited in FT.com by Sanderson 2010, "Accounting for mergers and acquisitions is failing investors because companies do not understand new reporting requirements and the rules themselves need improvement."
Numerous empirical research shows that succeeding in M&A has never been easy. Gadiesh et al. (2001), DiGeorgio (2002), Jennings (1985) and Haransky (1999), agreed with each other in several causes such as M&A deals lacking the right strategic rationale, poor management in the integration phase, lack of experience and overpayment to target are the leading feature to failure. (cited in Hoang and Lapumnuaypon, 2008). However, whether shareholders of acquiring company experience a wealth effect from M&A is still a debatable issue among managers, academic researchers and business leaders (Hassan et al. 2007). Secondly measuring value creation from M&A transaction and determining how the created wealth is distributed between acquirer and target firm are two of the central objectives of M&A researcher. (Andrade et al. 2001)
Since the net effect of the mergers and acquisitions transactions remains indecisive regardless of several studies, there is a need to conduct future research in this area. This research work is set to evaluate if value is actually created for the shareholders of acquiring company or not? And if not, why engage in spending so much time and money on M&A?
This research work is important because M&A transaction in the Pharmaceutical industry and also in other industry require enormous funds to get done. It also require considerable amount of executive time and aptitude (Hassan et al. 2007). Clear understanding of merger transaction, knowing what it delivers to the economy, is important as it will be useful to a wide range of shareholder. In addition, this research will provide useful guide to UK players who are planning to go for M&A deal in pharmaceutical sector.
Most study on M&A were done in the US which focus more on the financial sector, so that the results from these US experience cannot be applied to UK environment directly, especially to the pharmaceutical sector because, they focus mostly on US financial sector, consequently it is essential to carry out research on the effect of M&A in the UK market.
An event study approach will be used to examine the impact of M&A announcement on stock prices which will also investigate whether shareholders of acquiring company generates abnormal returns or not?
Aims of The Research
As the title of the dissertation suggest, the most important objective of this research work is to invetigate the impact of M&A activities on the shareholders of acquiring companies, by examining merger between Glaxo Wellcome and SmithKline Beecham that occurred in the UK Pharmaceutical sector in the year 2000. Focus is on GlaxoSmithKline, the second largest pharmaceutical & healthcare company in the world to examine the presence of abnormal return for the shareholders of acquiring company. This research attempts to broaden the scope of existing literature by focusing on UK based pharmaceutical industry.
This research aims to:
1) Critically evaluating whether the shareholders of acquiring companies experience abnormal returns as a result of M&A
2) Evaluate the impact of merger announcement on acquiring firm's share price.
Limitation of The Dissertation:
Up-to-date information is one of the limitations of the study because of the unavailability of information. As the research, work was assign to me during the semester, so the time constraint played its role. Despite time constraint, I have conducted a wide-ranging research. To overcome this, my friends guided me a lot. My supervisor Dr Gerrald Pollio, has always been motivational factor and his feedback has always helped me a lot, and without those feedbacks, it would have been impossible to write this proposal. The incomplete experience in the research field played a wider role. This is the first study that goes to my credit. Hence, I did not have any experience in the field.
GlaxoSmithKline is a UK based 2nd largest pharmaceutical and healthcare company in the world headquarterd in the United Kingdom. It is listed on both London stock exchange and New York stock exchange. GlaxoSmithKline is one of the industry leaders, having almost 7% of the world's pharmaceutical market. In addition, GlaxoSmithKline (GSK) is the only pharmaceutical firm researching both medicines and vaccines for the World Health Organisation's (WHO) three priority diseases 'HIV/AIDS', 'tuberculosis', 'malaria'. GSK spends huge sums of money on research and development. GSK employs over 100000 people, having more than 80 manufacturing sites in 37 countries. (www.docstoc.com)
Glaxo originates in Bunnythorpe, a city of New Zealand, in 1873 by Joseph Nathan. Glaxo was already the player of merger game as before Glaxo Wellcome was created in 1995, when Glaxo acquired Wellcome for £9bn, which was then the biggest merger in the corporate history of UK. (www.wbiconpro.com)
The M&A activities in the pharmaceutical sector started Late in the decade of 1980, when Smithkline Beckman and Beecham merged. SmithKline Beckman was it self created from the 1982 merger of SmithKline and Beckman Instruments (Hand, 2000).
Structure of The Dissertation:
The dissertation is divided into five main chapters.
Chapter one provides a brief introduction into topic area of research. This chapter provides the key aims and objective of the dissertation. Scope and limitation of the dissertation also highlighted. It also gives a summary of the dissertation as it relate to each chapter.
Chapter two provides the relevant literature reviews, starting with the definition of key terms, types of merger and the distinction between merger and acquisition. This chapter also highlights the motives and drivers of M&A. This chapter takes critical review of the different research report on the effect of M&A on shareholders wealth. It also discuss reasons behinds it failure. Methods of payment in the case of M&A and its effect on abnormal return have examined. Stock market reactions also considered.
Chapter three discuss the research methodology and justifies the research methods used within the dissertation context by highlighting features and limitation for various methods. It also discuss the data collection technique.
Chapter four shows collection of data and its analysis using graphs and tables. Attempt been made to find whether acquirer company generates abnormal returns for the shareholder or not? Reference were used to explain the findings.
Chapter five is the conclusion part, which presents a comparison of the primary event study research finding and the earlier literature. And finally conclusion drawn from research findings. It also propose recommendation for future studies. A reflection of how the dissertation progressed and what was learnt from undertaking this study is also mentioned in this chapter.
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