Download RIL RPL Merger PDF

TitleRIL RPL Merger
TagsMergers And Acquisitions Oil Refinery Stocks Takeover Book Value
File Size260.9 KB
Total Pages22
Table of Contents
                            Chapter: 5
	Effect of RPL-RIL Merger on Shareholder’s Wealth and Corporate Performance
Section 1
1.1 Highlights of Merger
	Table: 1 Comparison with Largest Indian Cos /Groups in the year of merger (2002) Crores
Section 2
Section 3
Section 4
Share Price Analysis & Interpretation

	Table: 11 Mean and Median Return% for different time window: RPL
	Table13: Operating Performance
	Table14: Per Share Ratio
	Table 15 : Profitability Ratios
	Table 16: Liquidity and Solvency Ratios
Section 6
Conclusion and Implication
Document Text Contents
Page 21

The result fail to support the capitalization hypothesis that bidder’s gains are
captured at the beginning of merger program. Focusing on the period between
announcement period and outcome period it is observed that negative excess returns do
not represent a ‘fair game’ as required if markets are efficient. The analysis for time
period 0 to 224 days (the period of announcement day to the outcome day) shows that the
mean and median abnormal return was –0.051% and 0.02%. The results exhibit negative
abnormal returns in almost every time interval surrounding the announcement period.
The announcement day abnormal return was found to be 1.5% under the market return
method and 0.58% under the market model method. RIL’s shareholders receive a 5-day
average excess return of 0.06% under market model method. But there is negative
abnormal performance during the 20 trading days before the press day to 20 days after
the press day.

The study identifies that there was no possible leakage of information about the
announcement of the merger before it appeared in the press based on the pattern of
abnormal returns surrounding the announcement period. The results indicate that this
merger is not positive net present value activities for acquiring firms and merger program
was not consistent with the value maximizing behavior by Management. For the target
firm RPL, the announcement day return was found to be –0.867%. The Cumulative
abnormal return decreases from –1.74% to –13.75% during the period t = -10 days to t =
+ 10 days. The results do not support the argument that all benefits from merger are
capitalized in the acquiring firm’s stock price at or before the announcement of a merger
program. Another implication of market efficiency is that merger related stockholder
gains should be reflected in premerger stock price performance. In the context of wealth
maximization by the managers, it is expected that both merging firms exhibit normal or
superior pre merger price performance. The Cumulative abnormal return graph observes
some positive abnormal performance for RIL in the premerger period.

The merger, which could be explained in terms of operational synergy, has not led
to financial synergy in the short run. The operating performance analysis reveals that
percentage changes in the post merger period has declined compared to premerger period
with respect to EPS and P/E ratio showing negative changes. Net profit increased by
26.51% in the post merger period. Sales increased by only 13.93% in the post merger
period compared to 37.96% in the pre merger period. The merged firm has not shown
significant improvement in asset productivity based on percentage changes of comparison
between the pre merger and post merger period.
The question remains if this merger could be justified from stockholder point of view and
is the enhancement of stockholder wealth the sole motive for the merger. Or was this only
a reflection of the general erosion in stock market values the world over, in the aftermath
of terrorist attacks in the United States in September 2001 and the consequent global
slowdown in economic growth.

The study cannot be generalized, as it could not be justified on the basis of a
single case study. The long-term effects of merger in terms of financial performance
could be analyzed only in the due course of time. Given the complexity and heterogeneity
of reasons for mergers, a more promising approach that provides new insights into factors
that influence the outcome of mergers would be to pursue clinical studies involving a
number of mergers in greater detail. These clinical studies can become the fruitful
avenues for future research.


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