Efeect on Stock Prices Pre and Post Merger

Topics: Stock market, Banks of India, Mergers and acquisitions Pages: 9 (2612 words) Published: January 19, 2011

Mergers and acquisition is a business activity which started in the beginning of the twentieth century i.e. the post globalization era in India. This project aims at examining the effects of such merger announcements on the acquiring firms’ stock prices. The purpose of the project is to investigate whether the trends in the banks stock price after the merger announcement is same as in the past. Data such as the market index and the stock prices for the banking firms that are listed in the stock exchange will be taken for the study.

These subjects combined together lead to the following hypothesis: H0: Mean Of Sample 1(Stock Prices Of 31-Days Before Merger Announcement) =Mean Of Sample 2 (Stock Prices Of 31-Days Before Merger Announcement

To illustrate and to try to answer our research question, we have conducted our study based on a sample of 15 merger announcements in the Indian banking sector. The analysis has been achieved by collecting data from Centre for Monitoring Indian Economy (henceforth CMIE). We’ve also tested the hypothesis of there being an abnormal return on the daily basis (t=0 to t=30) in the month of merger announcement or not, for which we received an affirmative result.


The last two decades have witnessed perhaps the most drastic process of corporate consolidation in history. Since the middle of the 1980s, the rate of global merger activity has risen exponentially. towards the end of the 20th century and beginning of the 21st century, the value of global mergers rose 100-fold, reaching $15 trillion. The number of merger deals announced increased three times in the year 1999, compared to that of a decade earlier.

Merger and acquisition activities have been seen across numerous sectors, among those the industries most affected have been financial services, telecommunications, pharmaceuticals, media, automotives, defence, food retail and energy. A marked trend in mergers and acquisition is that corporate consolidation has been self-perpetuating, with big mergers following other big mergers as companies struggle to keep pace with their larger competitors. Such types of trend might as well trigger a snowball effect that leads to rapid concentration in markets.

The Indian corporate sector too experienced such a boom in mergers and acquisition led restructuring strategies especially after libaralisation mainly due to the presence of subsidiaries of big MNCs here, as well as due to the pressure recorded by such strategies on the domestic firms. Firms merge for strategic reasons to improve operational or financial synergies. These synergies might be implemented through cutting of costs and risks and economies of scale. We could observe that there have been too many mergers in the recent past for acquiring growth and market power. These kinds of mergers are particularly popular in the banking sector. III. PROBLEM DEFINITION

Market sentiments play a big role in determining the stock prices. Stock prices can go up or down significantly on the basis of a sudden happening that takes place in the economy. In the face of globalization and liberalization, mergers and acquisitions have emerged as one the powerful growth strategy in the hands of the companies.

This research paper tries to examine the effects of merger announcements on the bidding firms’ stock prices. Past trends reflect that bidder stock prices are more likely to increase when a merger is announced, given that the recent mergers by other firms have been received well by the investors or if the overall stock market is doing better. IV. DATA COLLECTION & METHODOLOGY

The data required for the analysis is the details of the market index and the stock prices, 31 days Pre and Post merger announcement. The data has been collected by secondary sources with the help of Center for Monitoring Indian Economy (CMIE) Prowess, official websites of BSE and NSE and also search engines like yahoo and google....

References: Asquith P. (1983). Merger Bids, Uncertainty and Stockholder Returns, Journal of Financial Economics, 11, 51-83.
Brown, S. J. & Warner, J. B. (1980). Measuring Security Price Performance. Journal of Financial Economics, 8, 205-58.
James W. Wansley, Rodney L. Roenfeldt and Philip L. Cooley, (Jun., 1983), Abnormal Returns from Merger Profiles. The Journal of Financial and Quantitative Analysis. Published by: University of Washington School of Business Administration. Vol. 18, No. 2 pp. 149-162.
Levin R. I. and Rubin D. S. (1998). Statistics for Management. Published by Pearson Education, Inc. and Dorling Kindersley Publishing, Inc. ISBN 978-81-7758-584-1. 7th Edition, pp 468 – 473 & 648-671.
Michael Lubatkin (Jan. - Feb., 1987) Merger Strategies and Stockholder Value, Strategic Management Journal. Published by: John Wiley & Sons, Vol. 8, No. 1 pp. 39-53.
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