In today's competitive environment, businesses continuously seek ways and means to sustain in the market. This task has become extremely difficult due to developments in technology, globalization, market efficiencies, rapid change in customer needs etc. Everyday thousands of new businesses emerge around the world increasing competition. On the other hand existing businesses try to expand through product development strategies, market development strategies and diversification. Business development through own resources, requires long time and effort to gain benefits. Therefore in today's fast moving environment companies prefer expansion through mergers and acquisitions. The mergers & acquisitions (M & As) phenomenon started to become the focus of much scientific investigation in Germany (among other places) only at the beginning of the 1980s sited by Oliver and Petra 2008. An acquisition is when one company buy another business and end up controlling it. A merger is when you integrate your business with another and share control of the combined businesses with the other owner(s). This has it's own advantages and disadvantages to shareholders, which makes the acquisition a success or a failure. There fore it is the objective of the present research to investigate the impact of acquisitions on shareholder wealth and to measure the financial performance.
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Firms undertake acquisitions to achieve economies of scale and scope, and market power (Hitt, Ireland, & Harrison, 2001). Sited by Dinesh, Kent 2008 There are many good reasons for growing a business through an acquisition or merger. These include:
- Obtaining quality staff or additional skills, knowledge of your industry or sector and other business intelligence
- Accessing funds or valuable assets for new development. Better production or distribution facilities are often less expensive to buy than to build.
- Accessing a wider customer base and increasing the market share.
- Diversification of the products, services and long-term prospects of the business.
- Reducing costs and overheads through shared marketing budgets, increased purchasing power and lower costs.
- Reducing competition. Buying up new intellectual property, products or services may be cheaper than developing within the company.
However, a merger or acquisition can also create its own problems. In order to minimize the confusions, it is required to consider whether the business is ready for expansion. This can be done by carry out a SWOT (strengths, weaknesses, opportunities and threats) analysis to assess the business. Analysing the results carefully will show how to build on strengths, resolve weaknesses, exploit opportunities and avoid threats. On the other hand it is required to assess external factors, especially the impact of the economic climate on the price of a deal. Another strategy technique is a gap analysis. This involves detailed analysis of where the business is now and where it wants to be in the future. By analysing the gap between the two, will provide an indication of the level pf investment and growth required to achieve long term goals. On the other hand an acquisition to be successful, the right company must be selected at the right time. Lack of understanding of the causal link or path between an action and its performance outcome within a focal firm (King & Zeithaml, 2001) Sited by Margret, Petra and David 2008. It can hinder successful strategy implementation because intrafirm linkage ambiguity limits managers' ability to accurately predict the outcome of specific implementation decisions, leading to suboptimal decisions and ultimately harming performance (King & Zeithaml, 2001) Sited by Margret, Petra and David 2008.
In the past many researchers try to understand whether acquisitions create any value creation to the shareholders. The assumption of most research is that the goal of an acquisition is higher financial performance (e.g., Barney, 1988; Datta, 1991; Lubatkin, 1987; Zollo & Singh, 2004), but meta-analyses have shown that on average acquisitions fail to create value for acquiring firm shareholders (Datta, Pinches, & Narayanan, 1992; King, Dalton, Daily, & Covin, 2004). Sited by Margret, Petra and David 2008) However, for generating competitive advantage, a firm's exploitation of existing resources during strategy implementation is arguably as important as changing the stock of resources it owns (Barney & Arikan, 2001; Sirmon et al., 2007) Sited by Margret, Petra and David 2008. Although an acquisition represents one case in which a firm significantly alters its stock of resources, the challenge of integration is to implement the strategy behind the acquisition by reconfiguring, realigning, and rationalizing not only the target's resources, but also the interactions between the acquirer's and target's resources (Capron, 1999; Karim, 2006; Karim & Mitchell, 2000). Sited by Margret, Petra and David 2008.
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Since the 1980s, researchers have been exploring the pre acquisition, or selection, stage of the acquisition process. They have argued that the synergistic opportunities inherent in an acquisition are contingent on the strategic fit that the acquisition offers in the form of resource similarity or complementarily. Many studies have confirmed this argument
(Harrison, Hitt, Hoskisson, & Ireland, 1991; Kusewitt, 1985; Lubatkin, 1987; Pennings, Barkema, & Douma, 1994; Ramaswamy, 1997; Shelton, 1988; Singh & Montgomery, 1987; Zaheer, Castan˜ er, & Souder, 2004). Harry, Mario 2008
More recently, however, the bulk of the research attention has shifted toward a second contingency that arises in the post acquisition, or implementation, stage of the acquisition process: organizational fit. The argument is that, although strategic fit is a necessary condition for synergy realization, it merely creates synergistic potential that can only be realized through effective integration of an acquired firm (Haspeslagh & Jemison, 1991; Jemison & Sitkin, 1986) Harry, Mario 2008. In line with this view, studies have shown that integration enhances acquisition performance (Datta & Grant, 1990; Shanley, 1994; Zollo & Singh, 2004) Harry, Mario 2008. In fact, Larsson and Finkelstein (1999) sited by Harry, Mario 2008 found it to be the single most important predictor of synergy realization.
Hence, after an acquirer selects and acquires a firm with synergistic potential, it is up to the acquirer to unlock as much of this potential as possible by building sufficient organizational fit (Pablo, 1994) Harry, Mario 2008. However, this is a complex task that requires considerable management time and attention spent on “combining similar processes, coordinating business units that share common resources, centralizing support activities that apply to multiple units, and resolving conflicts among business units” (Hitt, Harrison, & Ireland, 2001: 86) Harry, Mario 2008. The high rate of mergers and acquisitions failures indicates that often organizations underestimate the importance of risk management in mergers and acquisitions decision-making. The internal audit function can improve the quality of risk management throughout the M&A process by conducting due diligence and providing expertise in business process integration. With investors, regulators, and the media placing companies under greater scrutiny, internal auditors need to be prepared to take on a more prominent role in the risk management processes connected with M&As. Therefore it can be understood that finance department plays a major role in the success of such strategic decisions.
Although research on acquisitions has paid considerable attention to the economic motivations and incentives behind corporate strategy decisions, relatively little is known about when and how the search processes resulting in corporate strategy changes occur. Recent studies have focused on prior acquisition experience (Haleblian & Finkelstein, 1999 sited by Dinesh and Kent 2008) and acquisition performance (Haleblian, Kim, & Rajagopalan, 2006 sited by Dinesh and Kent 2008) to predict acquisition performance and acquisition likelihood, respectively. Haleblian, Kim, and Rajagopalan (2006 sited by Dinesh and Kent 2008) found that prior acquisition experience and recent acquisition performance were positively related to the likelihood of subsequent acquisitions. However it is not the purpose of this research to understand the timing of acquisitions.
Having understood the importance of mergers and acquisitions for growth, present research try to analyze whether such decision would increase the shareholder wealth. In doing so Tata Steel Company has been selected as a case study. Most of the studies on acquisition performance have used one of the standard financial measures: market based model and accounting. The fundamental difference between the two streams of research is the type of data used to measure the performance of firms. One is the stock market approach which uses stock market valuation to determine post-acquisition performance and other is the accounting data approach which directly focuses on a company's profitability, efficiency and growth. To investigate accounting based performance of Tata steel company, available data of five years of pre- and post- acquisition period was collected from there web portal. In the he analysis, a sample of merger events that happened between August 2004 and April 2007 was composed from merger and acquisition bids announced in the Tata steel news publication and online news database. Furthermore, only public traded firms were included because daily stock prices in the equity market were needed for the proposed statistical analysis. Furthermore, telephonic interview with financial team would be conducted to trace out the success of acquisition strategy of the company.
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In doing so present research will try to find answers for following research questions.
1 What is the acquisition strategy of the Tata steel company?
2 What is the financial position of the company after the series of merger and acquisitions?
3 How this strategy of Tata steel company added value to its shareholders.
The present project only concentrate on only one case study due to lack of time and resources. Therefore it will be difficult to genarelalize the findings to entire subject. At the same time the financial data used are subject to window dressing which will then affect the reliability and validity of findings. But it will provide a good understanding as to how M&A lead to improve shareholder wealth.