Saira Israil, Post-Graduate Scholar at Institute of Management Studies, University of Peshawar Pakistan. Email: saira.israil@yahoo.com
Naimat
Ullah Khan, Assistant Professor at Institute of Management Studies, University
of Peshawar Pakistan. Email: naimatims@yahoo.com
Abstract: This paper particularly addresses the impact of
mergers and acquisition (M&A) announcements on share prices in
Pakistani stock market from 2006 to 2014. It uses event
study method for a sample of 32 M&A announcements from
both financial and non-financial sectors. The result shows that M&A
declarations do not signal any significant information to Pakistani market.
Therefore, the findings show statistically insignificant abnormal returns on
announcements of M&A, however a significant positive abnormal return just before proclamation of merger and acquisitions
is noted. Similarly, the bidder firms show significant share price reaction and
also some gains before the announcement which may be because
of leakage of information (Khan, 2011). While after the
declaration both target and bidder firms experience losses but overall
conclusion detects that the target companies get fewer abnormal earnings as
compared to acquirer firms in case of acquisitions. The insignificant
unexpected returns on announcement date of M&A do not support semi-strong
form of EMH. The findings of this study help investors in devising their
investment strategies based on the timing of important announcements by
companies such as M&A.
Key words: Merger, Acquisition, Event Study, Semi-Strong,
Efficient Market Hypothesis, Pakistan.
Introduction
Merger
and acquisitions (M&A) always play an essential part in external expansion
of businesses. During the 5th M&A wave, amalgamation and
possession extended all over the world, especially in Asia. Due to this
technological growth and globalization in the world all corporations are trying
to maintain their competitive position. That’s why all firms need to build an appropriate M&A strategy in order to improve its
performance and also maintain its existence for
surviving in this competitive market. Several researches acknowledged
that due to globalization advancement, a number of companies prefer the M&A
as a means to broaden the company, advance existing production and increase
their market share. The same fashion has been observed in Pakistan where large
number of merger took place in many sectors especially in banking industry.
As an
emerging market, according to analysis by Bloomberg, Pakistan ranked third
in 2014 amongst the top ten best performing markets in the world and
second the most mature stock exchange in south Asia. Besides this Karachi Stock
Exchange (KSE, now Pakistan Stock Exchange, PSX; hereinafter PSX and KSE will be used interchange-ably)[1] is one of the major stock exchanges in
Pakistan. It revealed significant growth in few precedent periods.
This study analyzes the impact of M&A
announcements on share prices on the KSE. The reason behind
conducting study on the KSE is that a lot of work has been done on this topic
in developed countries but very little is known about its influences in case of
Pakistan. This study analyses cases of M&A from both financial and
non-financial sectors. In addition, the main reason of choosing banking sector
(financial sector) of Pakistan is recently experiencing regulatory changes in
the industry. The State Bank of Pakistan has increased paid-up-capital for all
banks operating in Pakistan from Rs.1 billion in 2001 to Rs. 10 billion in 2013
(Tauseef & Nishat,
2013). The increment in paid-up capital compels many
banks to either merge with other small banks or being acquired by other banks.
The last decade is considered as “merger and acquisition decade” in banking
sector of Pakistan. Now, it is a suitable time to analyze the effect of M&A
on share prices.
Problem Statement
M&As
have become increasingly widespread in the 1990’s. According to the UN’s World
Investment Report (UN, 2000), worldwide M&A grew at an annual rate about
42% over the period 1980-1999 to reach $2.3 trillion in 1999 where more than
24,000 M&A took place during that period (Liang, 2013). M&A activities have been a common form for
more than four decades in North American and European markets. In Asia, most of
the M&A activities have taken place after the Asian financial crisis in
1997 (cited in Liang, 2013, p. 3).
The stock markets of firms are affected due to different events
including the announcements of M&A. This research
analyzes the impact of M&A in banking sector of Pakistan over the period
from 2006-2014.
Objectives of the Research
The main
objective of this research is to analyze the effect of M&A on stock returns
of listed firms of the KSE. The banking sector of Pakistan is of prime interest
as many M&A took place in this industry due to increase in Minimum Capital
Requirements which compel the banks to either merge or be acquired by other
banks. The study can help in providing additional guidelines to decision makers
by simultaneously planning at the time of merger and acquisition. The results
can help shareholders in making investments decisions around M&A.
Theoretical Framework
This
study is used to judge semi-strong form of Efficient Market Hypothesis (EMH).
This theory assumes that share prices are the true reflection of all available
information in the market (Fame, 1970). EMH has three types: weak form,
semi-strong form and strong form. Weak form of efficiency assumes that past
share prices are embodied in today’s share prices. Semi-strong EMH states that
any public information should be quickly reflected in share prices in either
positive or negative manner. While strong EMH assumes that all information,
including past share prices, public information and private news, are available
to all investors and no investor can beat the market (Fama, 1970). This
research uses M&A events as public information to test semi-strong form of
EMH. In case, there are unexpected returns on the day of M&A, it testifies
semi-strong form of efficiency that public information (M&A announcements)
reflects quickly in share prices.
Literature
Review
A significant amount
of literature gives facilitation to know about the effect of M&A on stock
returns (Gopalaswamy, Acharya & Malik, 2008; Simões, Macedo-Soares, Klotzle &
Pinto, 2012). It also gives
assistance in order to know that how target and bidder firms are affected by
it.
Liang (2013) examined the effect of M&A
declarations of firms listed on the Hong Kong Stock Exchange from 2007-2012.
For analysis, the researcher selected a sample of 44 firms. During this study,
event study was applied for measuring abnormal returns. The study found that the
acquiring firms achieved a constructive and momentous unexpected returns just 2
days pre & post of declaration dates.
Correspondingly Dianita, Tarmidi, and Hadian (2013) also analyzed the impact of M&A proclamations in Indonesia
from year 2005-2011 for 20 firms. Using the event study, the results showed
significant abnormal proceeds on the declaration date and there was a
significant Accumulated Abnormal Returns (AAR) prior to declaration of M&A
events. Similarly, Padmavathy and Ashok (2012) analyzed the impact
of merger announcements on stock price behavior in 2010 for a sample of 97
companies listed on the Bombay Stock Exchange.
Again, as a method to analyze the results, event method was demeanor to
discover AR. The event study method shows that M&A events failed to produce
any unexpected returns forbidders.
In the same way, Mahmood, Aamir, Hussain and Sohail (2012) also
observed the impact of merger and acquisition on post-merger life of 8
Pakistani companies for a sample of three years (2000-2002) using event study
method. Here results indicated that in five companies the stock prices were
affected positively while in two companies, one month after the merger, the
results were negative. Moreover, no change in the price of one company has been
found. Overall, the result specifies that M&A positively affects the stock
values of corporations.
Likewise Gopalaswamy et al. (2008) also carried
out research in India to check stock value response of companies due to M&A
declarations from 2000-2007. For analysis, 25 firms were chosen. On the basis
of standard event study model the author found growing tendency in CARs for
corporations and AR for firms before the time of announcements which again
confirmed the insider keenness.
Ma,
Pagan and Chu (2009) also examined the abnormal returns by
selecting a total sample of 1477 firms from ten Asian stock markets.[2] The
author exploits event procedure for measuring AR before and after the
transactions in three event windows. The findings suggest that the financial
benefits related with M&A were beneficial and it would be helpful in
external growth of firms so it was highly recommended to managers.
Similarly,
studies are also conducted in order to outlook the impact of M&A on target
and bidder firms which illustrate sometimes gains for both firms (Sana &
Nishat, 2013) but most studies demonstrate gains for target firms (Karnik, 2005; Manasakis, 2009; Shaheen, 2006).
Like Sana and Nishat (2013) examined the wealth
effect of merger and acquisition of seven M&A events in banking sector in
Pakistan over the period from 2003 to 2008. The authors divided the sample
merger and acquisition transactions into three categories[3]. The
investigation was carried out on the
basis of standard event study model in order to measure the impact of M&A on
the return of both bidder and target banks around 30 days event window of
announcement dates. It pointed out statistically significant reactions and also
the combined mean CARs for the target banks and bidder companies are both
positive and statistically significant.
Likewise Karnik (2005) also
assessed value creation for target companies’ shareholders in the Indian
context. The author, using a sample of M&A spread across industries,
compared the share prices of target firms before and after public announcements for open offer in relation to stock
market index. The study found that the effect of public announcements is
sometimes very short-lived. This study used differing time windows to test the hypotheses. It was found that
there was a significant value creation for target companies’ shareholders due
to public announcements as well as relative to benchmark index,
irrespective of the time window used for the study.
Manasakis (2009) also examined the
shareholder wealth effects of M&A in Greek over the period (1995-2001)
through means of typical event method. The study gave evidence of considerable abnormal returns by target investors due
to declarations. While on other side, the bidders’ companies had major
losses in these transactions. The M&A in Greek market failed to initiate
worth.
Shaheen (2006) explained acquisitions proclamation influence on share
prices with the help of market model of event study. For sample the
researcher only considered merger announcements after 1997 between two publicly
traded companies. Out of 467, only 40 announcements were randomly chosen which
shows that sample consists of 80 securities, which were large enough for
assessing firms. Beta’s parameter
estimation period and post event phase were constant for all securities in this
sample. The results indicated meaningful
positive abnormal proceeds for target businesses on pronouncements date.
Similarly Wong et al. (2009) also observed the effect of M&A announcements
on pricing activities of bidding investors in six Asian countries over the
period (2000-2007) for a sample of 95 mergers and 563 acquisitions. The authors
used market model and regression model in order to find abnormal value for
bidder and target firms. The study found drastically negative results for
target companies while good for bidders.
Bashir,
Sajid and Sheikh (2011) analyzed M&A influence on shareholder’s
wealth in 44 mergers companies of Pakistan from 2004-2010. Among these 44
mergers, 27 were in financial sectors and the rest occurred in non-financial
industries. The findings of event study showed that target firms experience
insignificant losses while the acquirer firms enjoy statistically insignificant
gains.
In
aforesaid literature it has been found that a lot of work has been done on the
issue of merger and acquisition and its consequences in emerging and developed
countries. All of which shows a mix pattern of results, some show positive
impact (Ma et al., 2009; Sana & Nishat, 2013) and some show negative
results on stocks (Manasakis, 2009; Wong, Cheung & Mun, 2009). As
due to technological development and globalization all firms in the world are
trying to sustain their competitive situation. The same pattern has been
observed in various sectors of Pakistan with limited research. Although
researchers have tried to determine the impact of M&A on stock returns
(Bashir et al., 2011; Mahmood et al., 2012; Sana & Nishat, 2013) but that
shows mix results which may be due to small sample used in the analysis. So
this current study tries to take a bigger sample of M&A cases in Pakistan.
Hence, this paper examines the impact
of M&A on stock return in Pakistani market from 2006 to 2014.
Based on
the above literature, the following hypothesis can be derived for testing in
the paper. The
following hypothesis is meant to be proved by this study:
Hο: AR=0: M&A has no
significant impact on share prices around the announcement date.
H₁: AR≠0: M&A
has a significant impact on share prices around the announcement date.
Methodology
A secondary data of M&A in Pakistan is
taken from competition commission of Pakistan (CCP’s website, 2014). There are
total 70 mergers and 372 acquisitions in Pakistan over a period of 2006-14
(CCP’s website, 2014). Due to non-availability of data, about 38 firms are not
included in this study in case of mergers. So to carry out this particular
research, a total of 32 firms both from financial and non-financial sectors[4] (see
Appendix for more detail) are taken as a sample size which announced mergers and acquisitions from 2006-2014[5]. In these 32 firms, 22 firms are those companies
which have been merged, five are the target and five are the bidder firms. The
secondary data is collected from the KSE website, Competition Commission of
Pakistan (CCP’s website, 2014) and other related websites like Bloomberg,
Business recorder and yahoo finance etc.
In order to test whether this M&A has any positive and negative impact on the KSE, an event
study is employed to calculate any unexpected returns around these announcement
dates (Brown & Warner, 1985; Dianita
et al., 2013; Fuller et al., 2001; Sana & Nishat, 2013; Shaheen, 2006; Travlos, 1987).
An econometric
way to determine the effect of certain events is termed as event study which is
the most used empirical methods in finance and accounting for this purpose
(cited in Eleclasson, 2010, p. 7). It observes response of market to
an incident, where facts regarding incident are available as a pronouncement
(Jogiyanto, 2007). Event study can disclose significant
information regarding how stocks respond to an occasion and also facilitate in
estimating other stock performance (Brown &
Warner, 1985). Similarly, it also
examines the information content of public news. Event study research is
usually associated with rapidness of facts approaching market and how quickly
that information is reflected in share prices (cited in Dianita et al.,
2013, p. 3). Hence, event study is used to measure the semi-strong form of
efficiency.
It determines average unexpected returns pre & posts to the
M&A announcements. Unexpected return is the difference between actual
returns and expected returns. Two procedures of projected returns are
considered in this study. First one is Market Adjusted Returns which is used
for scheming excess returns and the second one is Market Model Returns which is
used to measure abnormal returns (AR). The present study centers on market
model in analyzing unexpected earnings in the region of broadcast date of mergers and acquisitions (Bashir
et al., 2011; Dianita et al., 2013; Shaheen, 2006; Wong et al., 2009); as according to Strong (1992), market model is “the
mainly well-liked” technique in scheming unexpected proceeds.
According
to Dianita et al. (2013) the following steps are carried out for the
measurement of unexpected returns. Firstly, to calculate the actual returns
which are the gains from investment during period of observation. The share
returns by logarithmic method are computed by:
Rit=Ln
(Pit/Pit-1) [1]
Whereas Rit is the daily return of firm i on day t; Ln is the
natural log; Pit is the share price of firm i on day t; Pt-1 is the share price of firm i on the previous day.
To
inspect the impact of M&A on share prices daily data is used rather than
their weekly and monthly complement. While using the daily share prices,
however, various issues occur (such as thin trading etc.). In order to reduce
these difficulties, this study obtains Ln of share prices to bring the data
into normality (Strong, 1992). Furthermore, to address the econometric issue of
normality, non-parametric tests (such Wilcoxon Signed Rank Test) are also used
along with parametric tests.
Secondly,
the market returns are calculated with the help of following equation.
Rm = Ln (KSE-100t/KSE100t-1) [2]
Where,
KSE-100 index is used as a proxy for market returns.
Thirdly,
Excess Returns are calculated while comparing actual returns with market returns
where KSE-100 index is used as a proxy of market returns. A 21-day event window
is used for this purpose i.e., t-10 up to t +10 days. The ExR is deliberated by
the formula:
ExRit
= Rit- RMt [3]
Whereas
ExRit is the excess return of security i at time t; Rit
is the actual return on security i at time t; Rmt is the return on
the market index at time t.
Fourthly,
another alternative method of calculating unexpected returns is abnormal
returns where the expected returns are measured with the help of market model.
Consequently, it is premeditated by:
E(Rit)
=αi + βi.RMt + εi,t [4]
Where E
(Rit) indicates expected return on stock i; αi is
intercept of regression equation; βi shows beta is assessment
of systematic risk; RMt is market index(here KSE-100 show market
returns); εi,t is the residual error of the stock i and the
unsystematic risk.
Under
the method, the expected returns is calculated from estimated window which is
prior to the the event window. For this purpose, time t = 0 demonstrates event
date; Event window = [-10, +10]; Estimation window = [-110, -11] days.
For
projecting the market model parameters (α and β), various estimation
periods are considered in the literature. For example, Sulong et al. (2008)
used 61 trading days; Travlos (1987)
used 136 days; Liang (2013) included 120 days and Bacon et al. (2009) included
180 days in his estimation procedure. A parameter estimation period of 100
trading days is considered for this paper before the event window for estimation
of α and β. So when E(Rit) is once measured then
unexpected returns is considered by deducting the actual share returns from its
expected returns.
ARi,t = Rit -
E (Rit) OR ARit = Rit- (αi
+ βiRmt) [5]
While ARi,t
shows abnormal return of the stocki of the event periodt; Ri,t
shows actual return of the stocki of the event periodt and E (Rit)
indicates expected return of the stocki of the event periodt calculated using
market model.
Lastly,
Cumulative Abnormal Returns is calculated with the following formula:
CARit =
Whereas CARit is cumulative abnormal
return; ARitshows unusual return of the
stock and t is
event period (i.e., t+10 to t-10).
Empirical Analysis
This
section shows the findings of event study for a sample of 32 events of M&A.
The findings are categorized into three sub-sections: (I) Behavior of stock
prices of merged firms; (II) Behavior of stock prices of bidder firms; (III)
Behavior of stock prices of target firms
Behavior of Stock Prices of Merged Firms
Table 1
shows the detail of both abnormal and excess returns of merged firms over
21-days event window.
Table 1 Behavior of Stock Returns around Merger
Events
ABNORMAL
RETURNS |
EXCESS
RETURNS |
|||||
DAY |
Mean |
Median |
SD |
Mean
|
Median |
SD |
t-10
|
0.0159
(0.379) |
0.0013
(0.862) |
0.0809 |
-0.0104 (0.573) |
-0.0037 (0.651) |
0.0832 |
t-9
|
0.0088 (0.624) |
0.0060 (0.578) |
0.0813 |
-0.0159 (0.577) |
-0.0061 (0.702) |
0.1284 |
t-8
|
0.0269 (0.026)* |
0.0160
(0.040) * |
0.0512 |
0.0184 (0.140) |
0.0111 (0.187) |
0.0549 |
t-7
|
-0.006
(0.648) |
0.0018
(0.835) |
0.0632 |
-0.0082 (0.643) |
-0.0097 (0.198) |
0.0799 |
t-6
|
-0.039
(0.292) |
-0.0073
(0.251) |
0.1680 |
-0.0181 (0.656) |
-0.0019 (0.754) |
0.1832 |
t-5
|
0.0482 (0.243)
|
0.015 (0.164) |
0.1836 |
0.0213 (0.623) |
-0.0023 (0.896) |
0.1957
|
t-4
|
0.0183 (0.052)* |
0.0105 (0.040)* |
0.0420 |
0.0265 (0.128) |
0.0109 (0.059)* |
0.0764 |
t-3
|
-0.0131
(0.132) |
-0.0084 (0.224) |
0.0383 |
-0.0057 (0.734) |
-0.0068 (0.424) |
0.0751 |
t-2
|
0.0090 (0.437) |
0.0121 (0.118) |
0.0522 |
0.0144 (0.321) |
0.0106 (0.118) |
0.0650 |
t-1
|
-0.0146
(0.145) |
-0.0108 (0.266) |
0.0441 |
0.0118 (0.265) |
0.0044 (0.385) |
0.0470 |
t0
|
0.0214 (0.242)
|
0.0060
(0.465) |
0.0813 |
0.0192 (0.274) |
0.0020 (0.781) |
0.0780 |
t+1
|
-0.0311 (0.407) |
-0.0018
(0.889) |
0.1684 |
-0.0254 (0.323) |
-0.0081 (0.313) |
0.1149 |
t+2
|
-0.0103
(0.255) |
-0.0089
(0.251) |
0.0403 |
-0.01110 (0.270) |
-0.0070 (0.297) |
0.0449 |
t+3
|
0.0226 (0.258)
|
0.0029 (0.578) |
0.0891 |
0.0093 (0.674) |
-0.0079 (0.538) |
0.0996 |
t+4
|
-0.0102 (0.280) |
-0.0156
(0.020)* |
0.0422 |
-0.0200 (0.087) |
-0.0220 (0.014)* |
0.0509 |
t+5
|
-0.0083
(0.389) |
-0.0076
(0.348) |
0.0431 |
-0.0218 (0.104) |
-0.0131 (0.251) |
0.0588 |
t+6
|
-0.0047
(0.606) |
-0.0011
(0.889) |
0.0411 |
0.0002 (0.991) |
-0.0081 (0.297) |
0.0620 |
t+7
|
-0.0111 (0.157) |
-0.0101 (0.211) |
0.0346
|
-0.00246 (0.752) |
-0.0056 (0.487) |
0.0352 |
t+8
|
-0.009
(0.530) |
-0.0020
(0.781) |
0.061 |
0.0011 (0.936) |
0.0044 (0.578) |
0.0625 |
t+9
|
0.0104 (0.185) |
0.0037
(0.385) |
0.0347 |
0.0079 (0.606) |
0.0007 (0.917) |
0.0693
|
t+10
|
-0.0133 (0.260) |
-0.0057 (0.487) |
0.053 |
-0.0136 (0.384) |
-0.009 (0.287) |
0.0698 |
Note: In the above
table the P-values are indicated through the brackets while point out the
significance of the value at 5% critical value. Here for mean averages
one-sample T-test while for median Wilcoxon Signed Rank Test is exploited in
case of P-values.
The
following findings can be extracted from Table 1. Firstly, it is observed that
on merger declaration date, response of stock value to this news is not
noteworthy (Gopalaswamy et al., 2008; Padmavathy &
Ashok, 2012). The mean (median) abnormal return is 2.1 %
(0.5952%) respectively but the p-value of abnormal return is higher than the
5.0% critical value i.e., 0.24 (mean) and 0.46 (median). Similarly, on day t0,
the mean (median) excess return is at 1.92% (0.197%) but the p-value of excess
return is insignificant which is 0.27 (mean) and 0.78 (median). So, the declaration date shows an affirmative
mean (median) for AR & ExR but not significant at the 5.0% level. Due to
which the null hypothesis cannot be rejected which means unexpected returns of
share value on declaration date of merger are not significant. It shows that
merger announcement fails to incorporate any information to interested parties
on announcement date. This result also proves that the KSE is not efficient in
semi-strong form as it is unable to incorporate new information quickly. One
reason for this insignificant irregular gain to the market, on day of
declaration, may be the leakage of information before formal declaration (Gopalaswamy
et al., 2008)
Secondly,
Table 1 reports some significant values before announcement dates, for example,
day t-4 and day t-8 shows that mean value of abnormal return is 1.825% and
2.69% respectively which is statistically significant because its p-value is
0.052 and 0.040 respectively at 5% critical values. Similarly, the median of
both abnormal return and excess are significant on day t-4 (i.e., 1.048% with
p-value of 0.04) and 1.089% (p-value 0.05) respectively. The table also shows
that median of day t-8 is 1.60% and
its p-value (0.04) is significant. So statistically considerable
positive excess returns and abnormal returns are found immediately before the
announcement day (i.e., day t-4 and day t-8). While for other rest of the days
before declaration, the table indicates an insignificant mix of negative and
positive results for abnormal returns and excess returns. So overall, the
results propose a clue of information leakage to market prior to the
information of declaration which may cause insignificant unexpected gains on
day of declaration. This outcome is consistent with Gopalaswamy
et al. (2008, p. 99) findings who had
done research in India and found a significant AR for businesses before the
time of announcement which again confirmed the insider keenness.
Thirdly,
Table 1 shows a large divergence from mean for both AR & ExR in form of
standard deviation. In the vein of AR, it fluctuates as 3.4% on day t+7 to
18.3% on (t-5) day. Similarly in ExR, it differs from 3.5% to 19.5% on same
days. This huge variability in returns may lead to insignificant unexpected
returns on day t0.
Lastly, Table 1 also depicts that the mean
(median) of abnormal returns and excess returns of post-announcement dates are
statistically insignificant at 5% level except on day t+4 where the median of
both abnormal return and excess return is statistically significant and have
p-values of 0.02 (abnormal return) and 0.01 (excess return) at 5% significant
level. On average, the findings indicate an insignificant negative mean
(median) of both abnormal returns and excess returns during post-announcement
period. The significant values after announcements further strengthen the
argument of non-existence of semi-strong form of efficiency, as the market
takes some times to incorporate new information.
Share
Prices Behavior of Bidder Firms
Table 2 shows the results of event study around
21-day event window of bidder firms.
Table 2:
Share Price Behavior of Bidder Firms (Acquisition)
|
Note: In the above
table the P-values are indicated through the brackets while * point out the
significance of the value at 5% critical value. Here for mean averages
one-sample T-test while for median Wilcoxon Signed Rank Test is exploited in
case of P-values.
Many
findings come forward after a detailed assessment of Table 2. It also shows a
mix pattern of results.
Firstly, the results of Table 2 are consistent with the
results of preceding Table 1 which show inconsequential abnormal return (AR)
and Excess returns (ExR) on announcement date (Shaheen, 2006). AR of both mean (median) is -0.72% (-0.68%)
with its p-valuesof0.69 and 0.46 which are higher than 5% critical level.
Similarly, the mean (median) of excess return is -0.96% (-1.11%) while its
p-value is not statistically significant at 5% critical level. So it means the
null hypothesis cannot be rejected and there are insignificant negative returns
on announcement date. It refers that the KSE is not efficient in its
semi-strong form.
Secondly, table 2 shows some significant positive mean AR
(1.3%) on t-9 at 5% critical level (Liang,
2013).
Likewise there is significant AR and ExR on day t-3 as its p-value are 0.02 and
0.01 respectively. Similarly there is significant positive mean ExR on
t-5(1.15%) and t-6(1.33%) with significant p-values. Only day t-4 and t-8 show
significant negative median abnormal returns (i.e.,-1.0% and -3.7%) at 5%
significant level. Hence, on average, considerable positive response of share
values being viewed before formal announcements which may be because of the
insider trading (Gopalaswamy
et al., 2008).These results are similar to the findings of Liang (2013, p.18)“who examined M&A in Hong Kong
Stock Exchange and found that 2 days prior and later than declaration date a
positive and considerable AR by acquiring companies had been observed”.
Thirdly, table 2 illustrates the amount of standard
deviation which shows variation from mean values from very low to very high for
both abnormal and ExR values for example, it varies from 0.84% (day t-6) to
12.1% (day t-8). Equally ExR, it varies from 0.72% (day t-5) to 10.8% (day
t-8). So it shows a lot of variability in returns.
Lastly,
most of the mean (median) of abnormal and excess returns are insignificant in
post-acquisition period (Padmavathy & Ashok, 2012). Some values are still significant after Day
t0, for example, day t+3 which shows significant mean abnormal return and also
day t+4 where the median of both abnormal (0.93%) and excess returns (0.38%)
are statistically significant at 5% level (Liang,
2013).
Therefore, it has been noticed that mostly
there is no positive significant share prices reaction as well as no such considerable gain for the bidders
after the announcement of acquisition. While on other hand may be due to
information leakage, a positive significant reaction before the announcement
has been noticed (Gopalaswamy et al., 2008).
Share
Prices Behavior around 21-day Event window of Target Firms
Here the Table 3 shows a comprehensive picture of
the target firms results around 21-day of event window.
Table 3 Share Price Behavior of Target Firms
(Acquisition)
|
Note: In the above
table the P-values are indicated through the brackets while* point out the
significance of the value at 5% critical value. Here for mean averages
one-sample T-test while for median Wilcoxon Signed Rank Test is exploited in
case of P-value.
A number of findings can be extracted from table 3.
First, there is a negative insignificant mean
(median), abnormal returns and excess returns on the announcement dates for the
target firms. This result is similar with finding of Bashir
et al. (2011, p.263) “who had analyzed the impact of merger and acquisition in
Pakistan and found that the target firms experience insignificant loss while
the acquirer firms enjoy statistically insignificant increase in value.” It
refers that market is inefficient in semi-strong form where new information
(here M&A) is not quickly incorporated in share prices.
Secondly, Table 3 shows a very different
picture of target firms from that of bidders. The table shows that there are
insignificant negative mean (median) abnormal returns and excess returns on
most of the days prior to the acquisition’s proclamation dates. Therefore, no
major stock value reactions are noted before the pronouncement dates and no
significant gains for target firms (Bashir
et al., 2011).
Thirdly, Table 3 indicates that only on day t+9, there
is significant positive mean(median) abnormal and excess returns after the
announcements, i.e., with a mean(median) of abnormal returns are 4.0% (4.1%)
and excess returns are 4.4% (4.6%) with significant p-values at 5% level. For
rest of the days after announcements, the table presents insignificant negative abnormal and excess
returns for most the days except a significant gain on day t+9 for both
abnormal and excess returns. It may imply that acquisition announcements take
some times to incorporate such information and supports inefficiency in
semi-strong form.
Lastly,
Table 3 demonstrates standard deviation values which show a greater departure
from the mean values for both abnormal and excess returns. Such as for unexpected
values, it varies from 1.3% on day t+3 to 11.3% on day t-1. Likewise in excess
values, it varies from low 1.7% to a high of 11.3% on same days. This shows
variability in returns due to which the abnormal returns may not become
significant on day t0.
Conclusion
This
paper particularly addresses the impact of mergers and acquisition
announcements on share prices in Pakistani market from 2006
to 2014. The
current study uses an event study method in order to analyze the M&A
announcements on stock returns of 32companies listed on the KSE (or PSX). Out
of these 32 announcements, 22 firms are those companies which have been merged,
five companies are the target and five are the bidder firms. A number
of findings can be extracted from the results of event study. Firstly, the
results show statistically insignificant abnormal returns on the day of M&A
announcements (Gopalaswamy
et al. 2008; Padmavathy & Ashok, 2012) for merger firms. One reason for these insignificant unexpected gains
may be due to news leakage prior to the formal announcements because the firms
show significant share price reactions just before the announcements (Liang,
2013; Khan, 2011). So the current outcome also proposes leakage of news to
market immediately before the declaration of amalgamation (Gopalaswamy
et al., 2008). Alternatively, the findings indicate negative insignificant
abnormal returns after the announcements of merger.
Secondly, the results of bidder firms in
acquisition announcements are also consistent
with the merger
declarations, which indicate
that on proclamation day there is no significant share price reaction and also
the bidders do not gain any proceeds on announcement dates. On the other hand, there is considerable positive stock values
reaction prior to announcements of acquisition for bidder firms which may be because of the leakage of
information prior to formal announcements (Liang, 2013). Instead,
on average, the findings indicate insignificant negative abnormal returns after
announcements (Padmavathy & Ashok, 2012).
Thirdly, the results depict a very different picture of target firms from that
of bidders before and after the announce-ments of acquisition. So, on average,
no major stock value reaction is documented before the pronouncement date and
no significant gains for target firms (Bashir
et al., 2011). On average, the conclusion detects that the
target companies get less profit as compared to acquirer firms in case of
acquisition of Pakistani firms.
Based on the findings, this paper does not
support semi-strong form of EMH because there is insignificant unexpected
return on the day of announcements of both merger and acquisition. However,
there are significant abnormal returns before and after announcement date of
M&A. The significant returns before the formal declaration may refer to
leakage of information. Similarly, the significant values after announcements
imply that the market takes time to
incorporate any public news such as M&A. Further research can be found to
apply dedicated statistically tests to check the insider trading, if any. In
addition, the results have importance for investors to device the timing of
their investment decision around announcements of important events such as
M&A. This study suggests that investors can not earn abnormal profit on
announcement date of M&A.
References
Adebayo, O., & Olalekan,
O. (2012). An analysis of the impact of mergers and acquisitions on commercial
banks performance in Nigeria. Pakistan
Journal of Social Sciences, 9(3),
139-146.
Ali, S., & Akbar, M.
(2009). Calendar effects in Pakistani stock market. International Review of Business
Research Papers, 5(1),
389-404.
Ali, S. S., Mustafa, K., &
Zaman, A. (2001). Testing semi-strong form efficiency of stock market [with comments]. The Pakistan Development Review,
40(4), 651-674.
Bashir, A., Sajid, R.M., & Sheikh, S.
(2011). Impact of merger and acquisition on shareholders wealth: Evidence from
Pakistan. Journal of Scientific Research,
8(1), 261-264.
Brown, S. J., & Warner, J.
B. (1985). Using daily stock returns: The case of event studies. Journal of financial economics, 14(1), 3-31.
Chakraborty, M. (2006). Market
efficiency for the Pakistan stock market: evidence from the Karachi Stock
Exchange. South Asia Economic Journal, 7(1), 67-81.
Dianita, M., Tarmidi, D.,
& Hadian, N. (2013, November). Analysis of Announcement Merger and
Acquisition and Payment Method to Stock Return: Study of Listed Companies at
Bei During 2005-2011. 23rdInternational Business Research Conference,
World Business Institute.
Dodd, P., & Ruback, R.
(1977). Tender offers and stockholder returns: An empirical analysis. Journal of financial economics, 5(3), 351-373.
Fatima, T., & Shehzad, A.
(2014). Analysis of Impact of Merger and Acquisition of Financial Performance
of banks: A case of Pakistan. Journal
of Poverty, Investment and Development and Open Access International Journal, 5, 29-36.
Fuller, K., Netter, J., &
Stegemoller, M. (2002). What do returns to acquiring firms tell us? Evidence
from firms that make many acquisitions. The
Journal of Finance, 57(4),
1763-1793.
Gersdorff, N.V., & Bacon, D.F. (2009). U.S.
Mergers and Acquisitions: A Test of Market Efficiency. Journal of Finance and Accountancy.1(8), pp.1-8.
Gopalaswamy, A. K., Acharya, D.,
& Malik, J. (2008). Stock price reaction to merger announcements: an
empirical note on Indian markets. Investment
Management and Financial Innovations, 5(1),
95-103.
Hijzen, A., Görg, H.,
& Manchin, M. (2008). Cross-border mergers and acquisitions and the role of
trade costs. European Economic
Review, 52(5),
849-866.
Hussain, F. (1999). The day of the week effect
in the Pakistani equity market: an investigation. The Lahore Journal of Economics, 5(1), 93- 98.
Indhumathi, G., & Selvam, M, M. (2008).
Impact of mergers on stock return in Indian stock exchange with reference to
BSE. Department of Commerce. Available at SSRN: 180114.
Karnik, S. (2005). Do M&As
Create Value for Target Companies’ Shareholders. The ICFAI Journal of Mergers and
Acquisitions, 11(4),
62-76.
Khan, N. U. (2011). Dividend policy and the
stock market reaction to the dividend announcements in Pakistan. University of Dundee, scotland, UK.
Liang, C. (2013).The impact of merger and
acquisition announcements on firms’ stock performance: Evidence from Hong Kong Stock Market. Master
Degree at Finance Saint Mary’s
University
Ma, J., Pagan, J. A., &
Chu, Y. (2009). Abnormal returns to mergers and acquisitions in ten Asian stock
markets. International Journal
of Business, 14(3),
235-250
Mahmood, I., Aamir, M.,
Hussain, C. M., & Sohail, N. (2012). Impact of merger/acquisition on share
price-a case study of Pakistan. European
Journal of Scientific Research, 67(4),
617-624.
Manasakis, C. (2009).
Shareholder wealth effects from mergers and acquisitions in the Greek banking
industry. International
Journal of Banking, Accounting and Finance, 1(3), 242-256.
Odoru, M.I., & Agyei, K. S. (2013). Mergers & acquisition and firm
performance: evidence the Ghana stock exchange. Journal of finance and Accounting, 4(7), 99-107.
Olusola, A.O., & Olusola, J.O. (2012).
Effect of merger and acquisition on returns to shareholders of conglomerates in
Nigeria. Journal of finance and
Accounting, 3(7), 86-90
Padmavathy, S., & Ashok,
J. (2012). Merger announcements and stock price behaviour: Empirical evidence
from Indian stock market. International
Research Journal of Finance and Economics, 83(1), 153-160.
Shaheen, I. (2006). Stock market reaction to
acquisition announcements using an event study approach (Doctoral dissertation).
Simões, M. D.,
Macedo-Soares, T. D. L., Klotzle, M. C., & Pinto, A. C. F. (2012).
Assessment of market efficiency in Argentina, Brazil and Chile: an event study
of mergers and acquisitions. BAR-Brazilian
Administration Review, 9(2),
229-245.
Smit, C. J., & Ward, M. J.
D. (2007). The impact of large acquisitions on the share price and operating
financial performance of acquiring companies listed on the JSE. Investment Analysts Journal, 65, 5-14.
Strong, N. (1992). Modelling
abnormal returns: a review article. Journal
of Business Finance & Accounting, 19(4),
533-553.
Tauseef, S., & Mohammed, N. (2010). Wealth
effect of mergers & acquisitions in an emerging market: A case study of
Pakistan’s banking sector. Available at
SSRN 1653690.
Travlos, N. G. (1987).
Corporate takeover bids, methods of payment, and bidding firms' stock returns. The Journal of Finance, 42(4), 943-963.
Woolridge, J. R., & Snow,
C. C. (1990). Stock market reaction to strategic investment decisions. Strategic management journal, 11(5), 353-363.
Wong, A., & Cheung, K. Y.
(2009). The effects of merger and acquisition announcements on the security
prices of bidding firms and target firms in Asia. International Journal of Economics
and Finance, 1(2),
274.
Appendix
Panel 1:
List of Mergers Carried out In Pakistan from 2006 to 2013
Name of Company of Merger |
New name of the company / merged with |
Date of merger |
Mustehkam
Cement Limit |
Bestway
Cement Company Limit |
26/12/2013 |
Azam
Textile Mills Limit |
Saritow
Spinning Mills Limited |
21/2/2012 |
The
Royal Bank of Scotland Ltd |
Faysal
Bank Limited |
3/01/2011 |
Atlas
Bank Limited |
Summit
Bank Limited |
11/01/2011 |
MyBank
Limited |
Summit
Bank Limited |
6/07/2011 |
Stiefel
Laboratories Pak (Pvt) Ltd |
GlaxoSmithKline
Pakistan Limit |
14/01/2011 |
Askari
Leasing Limited |
Askari
Bank Limited |
10/03/2010 |
Al-Zamin
Leasing Corp. Ltd |
Invest
Capital Invest. Bank Ltd |
11/01/2010 |
Orix
Investment Bank Limited |
Orix
Leasing Pakistan Limited |
28/10/2009 |
AutomotiveBatteryCompany
Ltd |
Exide
Pakistan Limited |
4/05/2009 |
Network
Leasing Corporation Ltd |
KASB
Bank Limited |
17/02/2009 |
Shaheen
Cotton Mills Limit |
Shehzad
Textile Mills Limit |
21/12/2009 |
PICIC
Commercial Bank Ltd |
NIB
Bank Limited |
1/01/2008 |
Pirkoh
Gas Company (Pvt) Ltd |
Oil
& Gas Develop.Company Ltd |
4/09/2008 |
Nishat
Apparel Ltd |
Nishat
Mills Limited. |
11/11/2008 |
Suzuki
Motorcycles Pakistan Ltd. |
Pak
Suzuki Motor Company Ltd |
29/10/2007 |
International
Housing Finance Ltd |
KASB
Bank Limited |
22/11/2007 |
Dewan
Hattar Cement Ltd |
Dewan
Cement Limited |
22/10/2007 |
First
Allied Bank Modaraba |
Allied
Bank Limited |
25/08/2006 |
WORLD
CALL Comm. Ltd |
WORLDCALL
Telecom Ltd |
9/06/2006 |
Modaraba
Al-Tijarah |
Modaraba
Al-Mali |
11/07/2006 |
Pakistan
Papersack Corp. Ltd |
Thal Limited |
4/08/2006 |
Panel 2: List of Acquisitions Carried out In Pakistan
from 2006 to 2013
Target company |
Bidder company |
Date of Acquisition |
||
Habib
Sugar Mills Limited |
Bank
Al Haibib Limited. |
27-03-2009 |
|
|
MCB
Bank Limited |
Nishat
Mills Limited. |
16-06-2009 |
|
|
Royal
Bank of Scotland |
MCB
Bank Limited |
31-08-2009 |
|
|
Fauji Fertilizer
Company Limited |
PICIC
Investment Fund. |
04-01-2010 |
|
|
Royal
Bank of Scotland Limited |
Faysal
Bank Limited. |
10-08-2010 |
|
|
[1] Pakistan Stock Exchange (PSX) is the result of demutualization of three stock exchanges of Pakistan (i.e., Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange) in January 2016. The old performance indicator KSE-100 index is still used for measuring the performance of PSX.
[2] China, India, Hong
Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and
Thailand.
[3] The sample of M&A were categorized as, (1) Merger of Pakistani banks with the other domestic banks, (2) Acquisition of Pakistani banks by the foreign investors; and (3) Merger of Pakistani banks with the foreign banks operating in Pakistan.
[4] There
are 14 banks from financial sector while 18 companies from non-financial
sector.
[5] Due
to non-accessibility of data before 2006, only this period is selected.