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M&A works: Acquire to outperform, suggests study

Indian companies have done better than their peers after opting for the inorganic growth route

Sachin P Mampatta  |  Mumbai 

merger

who opt for acquisitions tend to outperform their peers after the deal, a trend contrary to the global perception that acquisitions are value-destroyers for acquiring  
 
The results are on the basis of a study which examined data dating back to 1998. It looked at monthly returns of 145 and 131 acquisitions between 1998 and 2010, with returns being calculated over a three-year period post the deal (up to 2013). 
 
“Before acquisition, the acquiring generated.. lower returns… (but)…their financial performance improved substantially after the merger...(and)…generated excess returns…compared to the returns generated by these benchmark This shows that the Indian acquiring have been able to realise synergy from the mergers,” said the study authored by Professor of Finance at and Associate Professor of Strategy at
 
The findings are part of a National Stock Exchange working paper entitled ‘Run-up in Stock Prices Prior to Merger & Acquisitions Announcements: Evidence from India.’ 
 
It found that mostly poor performing go for and acquisitions. The study looked at acquisitions funded by cash and also by stock. The former underperformed by 1.63% in the 36-month period before the announcement of the acquisition, while the latter underperformed by negative 1.07% excess returns in the same time period. They outperformed following the deals. 
 
Interestingly, the study also found that the merged tend to show a spike in share price before the deal happens. 
 
“The increase in stock price witnessed prior to a merger could reflect insider trading of the stocks. It is, however, not very clear why this run-up is witnessed only for the merged and not for the acquiring companies,” it said. 

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