This is to ascertain the post merger performance of the shares of Phoenix Rubber Limited. The purpose of the study is to determine whether the merger of Phoenix Rubber Limited resulted in greater benefits for the acquired shareholders than the acquiring shareholders.
LITERATURE REVIEW
MERGERS AND ACQUISITIONS
The second group of motives is based on the "undervaluation" of the target company. This was undoubtedly one of the most popular explanations offered for the merger wave of the late 1970s.
THE RELATIONSHIP BETWEEN AN ACQUIRING AND TARGET FIRM
Empirical studies show that both monetary and non-monetary goals of managers are related to the growth rate of the firm. Thus, managers are more interested in the size and growth of the company than its profit.
REASONS FOR FAILURE
34; Making extensive changes in management, personnel, policies and procedures after the transaction was completed, but before realizing what made the acquired company successful.” In the process of merging the Phoenix and Wayne divisions under one management team in 1992, a protracted strike culminated in the closing of the Phoenix plant, while a total rationalization program was being implemented. In the Wayne merger, the share price two weeks prior to the announcement date (May 12, 1989) was 75 cents per share.
There is no definitive answer as to why mergers do not create value for the acquiring shareholders because mergers fail for many reasons. In the Wayne Rubber merger, two companies with successful management and product/product market segments were brought under the control of a single board. The protracted strike culminated in the closure of the Phoenix plant while a full rationalization program was underway to bring the two management teams together, destroying shareholder value.
The integration program may have been based on incomplete information and may need adaptation to the new perception of reality after the merger. The natural uncertainty and anxiety must be handled with understanding, tact, integrity and sympathy. The absence of senior management commitment to the task of successful integration seriously undermines the confidence of target and acquired managers.
THE PHOENIX RUBBERIWAYNE RUBBER MERGER
The takeover on July 1, 1989 required Phoenix Rubber Limited to issue 48.2 million shares to Conshu Holdings Limited. Through this additional issuance of shares, Conshu Holdings acquired 82% of the expanded share capital of Phoenix Rubber Limited. Following the merger, the name Phoenix Rubber Limited was changed to Wayne Manufacturing Limited on August 13, 1989.
Wayne Manufacturing Limited became the holding company for Phoenix Rubber (Proprietary) Limited and Wayne Rubber (Proprietary) Limited, both wholly owned subsidiaries. 34;Phoenix's acquisition of Wayne Rubber, in exchange for the issuance to Conshu Holdings (Wayne's parent company) of 48.2 million ordinary shares, gives the enlarged group the strongest platform for expansion in the markets in which it operates.' 34;In addition, the combined resources of the new Phoenix provide significant opportunities for growth into new markets, which would have proven too expensive for either operation to consider separately.
The support of Conshu, which will own 82% of the increased share capital of Phoenix, brings another positive dimension and provides the financial support that will be needed to implement longer-term strategies. Phoenix, which will be renamed Wayne Manufacturing Limited following the merger, will now be the country's dominant supplier in almost all sectors of the rubber processing market, with a customer base ranging from mining and industrial to the medical and agricultural sectors.” 34;Retaining Phoenix's listing on the JSE will be such an important factor in future plans, as acquisitions are expected to be an integral part of future growth, and the use of equity capital adds another option to consider when financing these opportunities.
FINANCIAL PERFORMANCE OF WAYNE RUBBER PRE AND POST ACQUISITION
The strike culminated in the closure of the Phoenix factory while the full rationalization program was implemented. Wayne did not prepare an annual report for the year ending 30 June 1993 due to the company's impending delisting. The PIE figures fell correspondingly due to the higher earnings per share and a share price that traded between 60 cents and 80 cents.
The share price was at a level of 80 cents per share. June 30, 1992, probably because the stock was tightly held, 82% of Conshu. Clearly, the benefits of a merger were not reflected in the share price, nor were they reflected in the company's post-merger financial performance. The year 1987 recorded the highest number of new listings in a single year in the stock exchange's 100-year history.
During the buoyant market conditions prior to the October 19, 1987 stock market crash, prices of new listings on DCM rose more steeply than the rest of the market. No plausible explanation can be offered by Bhana for the poor performance of the sample of new issues during the one-year period immediately following the IPO. Subsequently, a period of protracted strike action culminated in the full closure of the Phoenix Rubber plant while the full rationalization program was implemented.
DIFFERENT VALUATION METHODS
Past financial achievements are not necessarily indicative of future earnings, much less future performance. The market for the products manufactured by the firm to be acquired must be carefully examined and evaluated as yesterday's sales are not indicative of tomorrow's demand. Only when all these considerations have been examined can the value of a business be assessed - a value that is fair to both buyer and seller.
In reaching an agreement on price, a number of factors must be considered, some of which are easily amenable to evaluation, and some of which are not. If it were possible to accurately determine an acquiree's future profit contribution and dividend-paying ability to the combined business, return on investment should be the only current criterion. Unfortunately, one cannot predict the future; and therefore historical and current data have traditionally been indicative of future earnings and dividend prospects.
In general, the purpose of methods 2, 3, and 4 is to determine whether the second sub-hypothesis—that the value of Phoenix is less than the price paid by Conshu—is true. In this method, a company is considered to be worth the sum of its net assets. Accordingly, when valuing a company for acquisition or merger purposes, non-book equity securities, which sometimes affect the replacement cost of investments, must be considered.
MKT/BK I
USE OF MARKET MODEL TO ESTABLISH ABNORMAL RETURNS
The market model is based on the fact that most stocks tend to go up and down together. In mathematical terms, it is simply expressed as a linear equation, which measures the degree of co-movement between an individual stock and the market. The important things about the market model are that: -. a) It is based on the observable fact that most stocks tend to go up and down with "the market" to a greater or lesser extent, and. b) It gives us a practical way to measure the risk of an individual security or portfolio of securities.
By comparing the behavior of a stock with the behavior of the market, we can measure the degree to which that asset tends to move with the market ("systematic" risk, measured by beta) and the extent to which it tends to move independent (the error term or “residuals”). This is the market model - a single index model of share price behavior - often used in event studies - beta (P) is calculated from the model and applied over the entire period. Monthly stock and market returns are calculated using the formula (Pl-Po)/Po from the data in Appendix 4 and are reflected in Appendix 6.
This is consistent with Bhana's (1989) study, which found that the DCM sector underperformed the rest of the market after the October 1987 stock market crash. In a study by Affleck-Graves, Flach and Jacobson (1988) using the market model, they discovered that the use of sector indices in combination with the market index does not significantly change the interpretation of the results. This similarity can possibly be explained by the fact that the sector indices exhibit a high degree of co-movement with the market and is consistent with the absence of significant 'industry' effects on the JSE as found by Visser and Affleck-Graves in a research. study from 1983.
CONCLUSION
This investigation has conclusively established that the benefits did not accrue to the acquiring shareholders of Phoenix Rubber. With one exception, neither group of shareholders benefited, but Phoenix's original shareholders suffered less than Wayne Rubber's shareholders, in other words, they gained more in proportion to their proportionate share of the expanded company. Under the agreement negotiated by Phoenix's controlling shareholders and Conshu, Schutz would have full control of the Phoenix division that operated out of the Jacobs factory.
In return, Conshu would not have to pay the premium price as the Schutzaktie would be retained in his hands to strengthen the incentive for him to act in the interests of the shareholders. Due to internal politics regarding control of Phoenix, it did not work out that way and in March 1992 Conshu Schutz paid the premium price of R1.20 per This did not prevail in the Wayne merger and the acquiring shareholders did not benefit from the merger.
It was not beneficial to force the acquired company management, who were already successful in their business, to be pushed with the corporate culture of the acquiring company. In the case of Wayne, it is clear that the failure to integrate management into a cohesive unit led to the collapse of the merger. Neither set of shareholders benefited, but the original shareholders of Phoenix suffered less than the Wayne Rubber shareholders ie.
BIBLIOGRAPHY
Dodd, P., (1992), The market for corporate control: A review of evidence, The Revolution in Corporate Finance edited by Stern, J.M., and Chew, D.H. Lev, Bo, (1992), Observations on the merger phenomenon and a review of the evidence, The Revolution in Corporate Finance edited by Stern, lM., and Chew, D.H. Phoenix Rubber Limited, (1989), Circular to shareholders regarding the proposed acquisition of Wayne Rubber, Durban.
APPENDICES
WAYNE BALANCE SHEETS APPENDIX 2 - WAYNE INCOME STATEMENTS
WAYNE SHARE PRICES AND ALSI
GRAPH OF WAYNE SHARE PERFORMANCE APPENDIX 6 - MONTHLY SHARE AND ALSI RETURNS
