File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Impact Of Mergers And Acquisitions On Shareholder's Wealth

It is a known fact that Mergers and Acquisitions affect the shareholders of Both companies, the one which is Targeted/acquired which is the Transferor Company and the one that is targeting/Bidder which is the Transferee company. This mostly affects the stock prices and its shareholder's value in different ways, which depend upon its present prevailing economic environment, the size of the company and the management of the merger process.

However, the conditions of the merger may have different effects on the stock prices of each participant in the merger. It may create value for 1 firm and may destroy value for another firm at the same time.

Due to the introduction of LPG policies in 1991, which are Liberalization, Privatisation and Globalization, has opened the gates for emerging markets like India to the world of mergers and acquisitions (M&A) more aggressively. Through this article, we will learn about the impact of mergers and acquisitions on the wealth of shareholders.

It is also a known fact that once any information is released in the market, soon after that the market starts reacting to such information. The investors look after the stock price jumps high, providing positive abnormal returns (ARs).

One of its examples could also be seen only last year when Elon Musk tweeted about Dogecoin which is a form of cryptocurrency, the worth of its shares hicked up instantly. However, post-announcement, a strong correction in the market price of the acquiring company takes place and positive ARs do not sustain for a long time.

This means after the announcement positive abnormal returns are seen in the share price but these gains are quickly reversed, for which the explanation can be:
  • Overvaluation
  • Integration Issues
  • Financing concerns
  • Macroeconomic factors
Due to this release of information during M&A, there are certain implications of these abnormal returns:
  • Stakeholder Concerns
  • Reputational Damage
  • Regulatory Scrutiny
  • Impact on Target Company

There are certain implications for the investors and shareholders:
  1. There is a general rule saying that the Earlier one sells its shares, the more gains a shareholder receives. It's said that the issuance of stocks for M&A is not good news.
  2. An investor can earn high rates of returns if one buys the share Two days before the announcement of shares and sells the shares Two days after the announcement.
  3. The announcements of cross-border acquisitions provide much higher returns than local/domestic acquisitions. For this, the potential advantages could be Access to new markets, acquiring resources like gaining access to new technology and talent, diversification after expanding geographically and tax benefits.
  4. The announcements of a whole company where there is an acquisition of wholly-owned subsidiary companies also, provide a greater and huge return than a sole individual company. In addition, the cumulative abnormal returns on a completely acquired company are more than that of a partial/majority control acquisition which are temporary.
The shareholder after the M&A sees a dilution of voting rights due to the increased numbers of shares released during the mergers process. This could be understood through an example: Let's say that there are two individual companies 'A' and 'B' who are willing to merge and formulate a new company 'C'. In this process the shareholder of both the company will have less number of shares in the new company as compared to when they had the total number of shares in their respective prior company.

The very much sole objective of the merger process is to maximize the shareholder's value so that each shareholder could receive more dividends and there could be an increase in share prices, to let them enjoy the capital gain.

To understand the concept above we also need to know about Shareholder value. In layman's terms, we can understand this as the value that a shareholder gets by holding those shares or the amount of money/ value that a shareholder gets after selling those shares in the market at a higher price. Therefore from the Mergers and acquisition perspective, a shareholder expects to increase the value of its shares, profits, and

earnings and reduce the cost which would eventually increase the stock price of the company and create a value for the shareholders.

As we have discussed in the beginning only and has also been proved through various other studies that the value of the acquiring firm or the targeted firm may increase or decrease after the merger and acquisition.

Two methods can help anyone know the impact of M&A:
  1. Accounting Principals: Through this method, we know that whether before or after the mergers the economic performance and profitability of the company have either increased or decreased.
  2. Efficient Market Price hypothesis: this method talks about market efficiency which can be used in share price movements to estimate the economic impact of the event. Which is to say, if the stock price decreases then it has increased the stock value and vice versa.
The Event Study Methodology is also one of the ways, through which the shareholder's wealth and performance can be accessed before and after the event. This is to say that if the stock price performance after the M&A has increased vis-a-vis the event, that means the M&A has created the share value.

In this, we consider M&A as an event and the date on which such event takes place is called 0 (ZERO) dat, then the performance is evaluated before and after the occurrence of such event.

The stock market reaction to M&A announcements could help to predict M&A profitability and help the investors speculate the happening, moreover, the short-term effects are of interest for immediate trading opportunities.

This methodology is based on the fundamental idea that stock price represents the discounted value of a firm's future stream profits.

Factors which affect the impact of M&A on Shareholder's Value:
  1. Nature of Industry
  2. Size and geography of the firm
  3. Type of merger
  4. Event window
  5. Economic circumstances
  6. Period of merger
  7. Profitability of target or bidder
  8. Share swap ratio
  9. Method of payment
In conclusion, understanding the impacts of M&A on shareholder wealth requires a comprehensive analysis, considering various methodologies and factors to navigate the dynamic corporate landscape.

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly