They attempted to analyze the wealth effects of mergers and acquisitions on both the shareholders of the acquiring and acquired firms. Most of the previous studies undertaken were conducted in Europe or the United States. However, the studies on acquiring firms seem to provide conflicting evidence of the effects of mergers.
This indicates that shareholders of the acquiring firm experience negative abnormal returns in the year following the merger announcement. With respect to the acquiring firms, Figure 1 indicates that the CARs exhibit a random pattern similar to that of the acquiring firms until approximately 13 weeks before the announcement. This indicates that the shareholders of the acquired firms earn quite substantial abnormal returns around the time of the merger announcement.
In the case of buyout companies, it is possible to see a downward shift in the CAR plot both in the weeks before the announcement and immediately after. Aftleck-Graveet al in their South African study of mergers and acquisitions on the JSE found that shareholders of acquiring companies do not benefit from merger activity in the short term. In their study, however, each of the four characteristics was considered separately for acquiring and target firms.
Whether the size of the target company was measured relative to the size of the acquiring company (the 'size' of the company can be pre-tax profits, turnover, market capitalization or any other measure) or in absolute terms, the conclusions were clear. A merger was classified as 'major' if the target companies' market capitalization was more than 25% of the acquiring company's market capitalization on the announcement date. This indicates a deterioration in investor confidence and expectations about the company's future cash flows.
The CAAR for the target company reflects the market's perception of what premium the acquiring company is willing to pay to complete the merger. This is reflected in the acquiring firm's post-announcement CAAR performance, with the acquiring firm's post-announcement CAARs canceling out the post-announcement CAARs of acquiring firms involved in unrelated acquisitions. The CAAR diagram (Fig. 8) for the sample of 18 acquiring firms that had effective control over the target at the time of the announcement is shown below.
The CAAR plot (Fig. 9) for the acquiring firms that had less than 50% prior control at the time of the announcement is also shown below. An acquisition was defined as "large" if the ratio between the market value of the target company and the acquiring company on the announcement date was greater than 25%. The CAAR plot for both samples shows a decline in the first half of the year before the merger announcement.
CASE STUDY 1
The group's downfall appeared to come with the acquisition of UK-based MIS Corporate Defense Solutions, which it began acquiring in tranches from April 1999. It initially bought part of the business for £1.5m, then in June increased it. to £2.5 million. MIS had initially guaranteed a profit of R25 million, but instead of achieving those figures, it fared very poorly, with little chance of a turnaround. In December 2000, Spicer and the unlisted IT company IQ announced that merger discussions were underway. This would result in a group with a market capitalization of R4 billion, placing it at the top of the IT sector in South Africa.
Spicer's share price rose from 158c to 215c by the end of December; apparently the market expected this merger to produce very positive spin-offs. The deal was contingent on the completion of a due diligence review of Spicer's local and international operations. In early 2001, Spicer issued a profit warning that indicated some of its businesses were in trouble. The announcement follows the completion of due diligence by the IQ business group ahead of their proposed merger.
Their final investigation into Spicer's dealings revealed gross irregularities at senior management levels in his UK MIS-CDS operation. The company's director was subsequently fired and these findings were a later deal breaker. Earnings per share plummeted from 3.2c to 0.4c in the six months to December 2000, and no dividends were declared. Markets punished Spicer after the end of due diligence on IQ Group after the two companies announced the merger news last year.
There has been no official announcement yet, but this morning's action in Spicer shares - down 17% to 44 cents on heavy trading in the first hour of trading - suggests the pending merger with South Africa's leading unlisted technology company, IQ Business Group , about to be cancelled” (Money Web. A clear rise in the share price can be seen towards the end of 1999, with the announcement of the proposed merger between Spicer and the IQ Group. Following the warning announcement and the subsequent cancellation of the proposed merger, there is a marked drop in the share price since December.
1999 to February 2000. The share price then falls further after the company's annual results are released in late February. The share price remained at this low level for the remainder of 2000 and 2001. Analysis of the stock statistics confirms that the company's takeover actions have failed to create value for the holder of these shares. Overzealous actions by the company during periods when the IT sector was booming ultimately resulted in its demise.
CASE STUDY 2
The initial market reaction to this acquisition was extremely negative, with analysts being particularly critical of the company for venturing into a sector in which it had no experience. Larry Lipshitz, the Group's chairman, tried to sell it to the market, on the basis that the acquisition of BBR would help the Group in its transformation from an asset-based company to one focused on technology, services , relevant logistics assets and intellectual capital. specifically in the fast-growing logistics sector. In November 2000, Super Group announced the sale of BBR Security to Chubb Security SA for R556 million.
Chairman Larry Lipshitz said in a press release that the BBR business no longer fits with Super Groups' overall strategy to transform from an asset-based business to one focused on technology and services. The capital return achieved by Super Group from the sale of BBR Security was excellent, and it further provided the Group with a large cash resource. The proceeds from this sale significantly reduced the leverage of the Group, while also restoring the confidence of analysts regarding Super Group being focused on their core operations.
The table below shows the effects of the sale, had the transaction been completed on April 1, 2000, for the unaudited six months ended September 30, 2000, on earnings per share, total earnings per share and net asset value. What the market initially thought was a bad investment decision has now turned into something very positive. The security business was based on extremely high annuity income with high cash generation. Over the course of its ownership, Super Group is able to recoup a fair portion of its initial investment, as well as use the large amount of money generated to finance other investment projects. Even the subsequent sale for almost three times the initial purchase price greatly contributed to the increase in the Group's liquidity.
CONCLUSION
Perhaps this is one of the key factors that companies should consider in mergers and acquisitions, as it emerges from research that has a strong impact on the ultimate success of the company. I therefore believe that mergers and acquisitions can lead to shareholder value creation, provided a clear strategy is defined and followed. These key elements relate to both the type of merger and the characteristics of the target company. If this set of acquisition criteria is applied consistently, then there is every chance that the acquisition opportunity will be successful.
BIBLIOGRAPHY
