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Analysis of Mergers and Acquisition and its impact on shareholder wealth.

In recent years, corporate restructuring through mergers and acquisitions has grown in prominence within the business environment. Initially encouraged by governmental bodies in India, this strategy entails the consolidation of two or more companies into a single entity. The main aim of these endeavours is to achieve financial synergies, increase diversification, and expand market share, among other strategic objectives.

Mergers and acquisitions exert substantial influence on both operational efficiencies and shareholder wealth. This article delves into these effects using real-world examples of M&A transactions.

A merger involves combining two or more companies or business entities into a single unified entity. Generally, mergers bring together companies of similar size to form a stronger, cohesive organization. During a merger, assets, liabilities, operational units, and other elements are consolidated and operate collectively within the newly formed entity.

Acquisition is a corporate strategy where a larger or more dominant entity buys a smaller or emerging entity to enhance its competitive position. In an acquisition, the acquired company loses its independent existence and becomes part of the acquiring company. Unlike mergers, acquisitions often involve a more competitive or sometimes hostile approach. This relationship can be depicted as follows:

Impact of Mergers and Acquisition transactions on shareholder wealth and operational efficiency:
A key focus of this corporate strategy is to generate financial synergy or create value. This value is realized through enhanced operational efficiency and increased shareholder wealth. There are certain ways by which shareholder's wealth and operational efficiencies are impacted. These are:

Market Efficiencies:
  • Market efficiency manifests through stock prices, which directly react to any information concerning mergers or acquisitions. When the market judges a merger positively, stock prices tend to appreciate. Conversely, unfavorable perceptions can lead to stock price declines. Similarly, during an acquisition, higher bid prices typically drive-up stock prices, whereas bids lower than perceived company value can depress stock prices.
  • High Volatility: When companies merge or are acquired, there is typically heightened market uncertainty regarding their operations and efficiency. This uncertainty causes investors to shy away from investing in the stocks of these newly combined entities, resulting in what is known as high volatility. Consequently, stock prices can fluctuate significantly as a consequence.
Mergers and Acquisition in India and its effect on shareholders wealth and operational efficiencies:
  1. Tata Steel acquisition of Corus Steel:
    In the mid-2000s, Tata Steel, a prominent steel producer in India, pursued a global expansion strategy. In 2006, Tata Steel began the acquisition of Corus Group, Europe's second-largest and the largest steel producer in the United Kingdom, with revenues totaling �9.2 billion in 2005.The acquisition process, spanning from September 2, 2006, to July 2, 2007, was valued at $12 billion USD. Despite initial optimism, the deal ultimately fell short of expectations, adversely affecting shareholder wealth and operational efficiencies. Following the acquisition, Corus Group experienced a significant decline in profitability over the subsequent two years, resulting in a 20% decrease in its share price and raising concerns among shareholders. Cultural differences between Tata Steel and Corus Group, arising from their cross-border operations (India and the UK), added complexity to management and impeded operational efficiency post-acquisition.
  2. Flipkart acquisition of Myntra:
    Flipkart, an Indian e-commerce start-up founded by Binny Bansal and Sachin Bansal in 2007 with an initial investment of 4 lakh, achieved a Gross Merchandise Value of USD 10 million by March 2011 through incremental strategies.

Myntra, another Indian start-up established by Mukesh Bansal, Ashutosh Lawania, and Vineet Saxena in 2007, initially specialized in personalized products like t-shirts. By 2012, Myntra had expanded its offerings to include 350 Indian and international brands.

In 2014, Flipkart acquired Myntra in an all-stock deal valued at USD 250 million. Acquiring companies within the same sector presents significant risks, akin to concentrating all efforts in one area. However, such acquisitions can strategically enhance market share if the acquired company leads in specific product categories. This strategic rationale guided Flipkart's decision to acquire Myntra.

Myntra expected to leverage Flipkart's robust logistics network post-acquisition, creating a mutually beneficial scenario for both companies. The acquisition positively impacted shareholder wealth and operational efficiencies, demonstrated by a 30.7% increase in users, 3.2% growth in sellers, a 32.6% rise in daily visits, and a 16.6% expansion in team size, leading to revenue reaching USD 1.5 billion.

The acquisition preserved the distinctive work cultures of both Flipkart and Myntra, maintaining Myntra's management structure without changes. Furthermore, employee roles remained unchanged, ensuring continuity in operations and fostering employee morale and support for the acquisition.

Mergers and acquisitions represent a corporate strategy aimed at achieving diverse objectives including financial synergy and other strategic goals. The case studies above illustrate how this corporate strategy can positively influence shareholder wealth and operational efficiencies.


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