VALUE CREATION THROUGH MERGERS AND ACQUISITIONS: A MYTH OR REALITY

Abstract

Growth is what every enterprise strives for as “survival of the fittest’ applies as much to entrepreneurs as to others in life. To endure, a competitor needs to be an over-achiever in every sense of the word. Hence, an unprecedented growth has become inevitable in the wide spectrum of industrial activities. It is a well known fact that the way to GROWTH is either through Greenfield expansions leading to Organic growth in one’s own unit, or Brownfield expansions resulting in Inorganic growth. Since the world is moving at a rapid pace and corporates are in a hurry to expand, restructuring through inorganic growth is a preferred medium. The name of the game is Mergers and Acquisitions (M&As) all over the globe. Indian companies, too, have learnt that this is a faster mechanism of growth. The surge in M&A activity worldwide and the rise of contested takeovers have highlighted the need to understand the criteria by which M&As should be judged. Shareholder value creation is emerging as the most crucial criteria in this area.  Many private sector organisations around the world have found implementation of the Economic Value Added (EVA), Market Value Added (MVA) and Free Cash Flow (FCF) as more effective tools for measuring Wealth creation. This paper has attempted to assess whether the M&A activity has been able to achieve its enshrined objectives of improved efficiency in the form of value creation. The study primarily focussed on those corporates that have used restructuring strategy during the time span of eight years (1997-2004). A-priori belief that M&As shall enhance value has been put to test in this study. The idea  is not only to assess what kind of capital appreciation is built into the stock as a result of the merger but also to ascertain if pre and post-merger, the stockholder has been able to receive greater returns as a result of synergies that flow from Mergers & Acquisitions. Our arguments are also getting vindicated by international observations in this arena - M&A activity, largely, has not been able to create much value.