Answer To: MA/MSc in Finance and Investment Module Integrative Research and Consultancy Project Assignment...
Robert answered on Dec 25 2021
Mergers & Acquisitions and it Impact on Financial Performances: A Study on
Publicly Listed Business Organizations in Middle East
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ABSTRACT
Mergers and acquisitions (“M & A”) as well as affiliated financial re-engineering are represent the
integral as well as larger element of overall business and finance realm. A business organization may
expand and grow by way of either an organic mode of expansion strategy or an inorganic mode of
strategy. In a historic context, evidently business organizations have attained growth as well as expansion
by way of M & As. The various set of research papers and studies in this context illustrate that financial
performances have improved to greater extent over the longer run post the M & As, and in addition there
have been increases in stock prices post the M & A deal. However the financial health concerning the
acquirer firms in rare instances illustrate similar or else better position, while in certain cases it is found
that the buyer is firms involved with the M & A leading to significant levels of decreases with the respect
to financial stability as well as having failed in creating wealth for the shareholders. The specific
objectives of this research study includes the following, (i) Review of M & As in Middle East region
business environment, (ii) Identify the impact of M & As in merged entities that are publicly listed in
Middle East in terms of financial performances relating to profitability, solvency, liquidity and
operational efficiencies using financial ratio analysis, (iii) Identify the impact of M & As in merged
entities that are publicly listed in Middle East in terms of value creation for shareholders using firm
valuations analysis, and (iv) Identify and propose the implications of M & As over the short and long
term financial performance of business organizations in Middle East based on the analysis undertaken.
The research methods employed for the study comprise qualitative exploratory study, quantitative
financial analysis and a qualitative interpretation of the data and results derived from the qualitative
exploratory study and quantitative financial analysis. The overall collection of data, results / outcomes
and analysis for the study are presented in this report.
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ACKNOWLEDGMENTS
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Table of Contents
Abstract ............................................................................................................................................ i
Acknowledgments........................................................................................................................... ii
CHAPTER 1: INTRODUCTION ................................................................................................... 1
1.1. Research Background ....................................................................................................... 1
1.2. Problem Statement ........................................................................................................... 2
1.3. Aims & Objectives ........................................................................................................... 3
Chapter 2: Literature Review .......................................................................................................... 4
2.1. Mergers & Acquisitions – Conceptual Overview ............................................................ 4
2.2. Mergers & Acquisitions in Middle East Region ............................................................ 14
2.3. Financial Performances – Financial Ratios & Firm Valuations ..................................... 16
2.4. Empirical Review ........................................................................................................... 20
Chapter 3: Research Methodology................................................................................................ 25
3.1. Research Methods .......................................................................................................... 25
3.2. Research Design ............................................................................................................. 25
Chapter 4: Findings & Results ...................................................................................................... 27
Chapter 5: Analysis & Discussions of the Findings ..................................................................... 29
Chapter 6: Conclusions & Recommendations .............................................................................. 31
6.1. CONCLUSION .............................................................................................................. 31
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References ..................................................................................................................................... 32
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CHAPTER 1: INTRODUCTION
1.1. Research Background
Mergers and acquisitions (“M & A”) as well as affiliated financial re-engineering are represent the
integral as well as larger element of overall business and finance realm. A business organization may
expand and grow by way of either an organic mode of expansion strategy or an inorganic mode of
strategy (Gomes et al 2013; Ismail et al 2011). In a historic context, evidently business organizations
have attained growth as well as expansion by way of M & As. Essentially, merger brings about two
separate entities for forming larger integrated organizations leading to a perspective that mergers can
be stated as “A company” merged with “B Company results” in larger and synergized “A company”.
This simplistic equation offers a special crux of explanation for M & As. The critical motive that is
underlying the purchase of a company is in increasing the wealth of the shareholders. Business
organizations that have stronger financials come forward for acquiring other interested companies in
creating a company that is more competitive as well as cost efficient for purposes of capturing greater
market share at a global level (Gomes et al 2013; Ismail et al 2011). This desire for selling part or
complete ownership of the company could arise from reasons like poor performances of specific
division, or else changes across larger strategic orientation pertaining to the company. On account of
the various reasons, the target companies shall usually agree for being acquired, being unable
(knowingly) for competing and surviving alone across a market with cutthroat competition. The
merger represents one amongst the highly effective / efficient manner of entering a newer market,
adding a newer product / service line (Gomes et al 2013; Ismail et al 2011).
The larger part of the corporate finance as function related to the corporate restructuring meaning
financial re-structuring, that in turn refers to the changes or modifications across capital structures of
a business entity, like that of adding / reducing debt and by the process increasing or decreasing the
financial leverage. Despite the same, these types of restructuring are critical in case of corporate
finance as well as are being undertaken often as part of financing activities leading to M & As (Weber
et al 2011; Gaughan 2010).
Mergers can be of three categories and these include, (i) Horizontal merger, (ii) Vertical merger and
(ii) Conglomerate merger. The expansion of economic nature which urges the companies for meeting
the rapid growing demands in economy by way of adopting M & A strategy are considered faster
metho of expansion in relation to the organic growths that are integral (Weber et al 2011; Gaughan
2010).
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M & As play a very critical role within business cycles at a broader economic level. The general rule
within business is that a company has to grow or else, wither and die. The company which is pursuing
growth track shall take away the market shares pertaining to its rivals, earn or generate huge streams
of profits as well as enhanced value for its shareholders (Akben-Selcuk & Altiok-Yilmaz 2011). The
companies which fail to grow or else remain stagnant get swallowed by companies that are financially
and strategically sound. Over the past five years, an approximate 92 per cent of overall liquidity
events had been realized using M & As while 8 per cent availed liquidity using Initial Public
Offerings (“IPOs”). The more recent time increases in merger related activity noted starting from 21st
century have been driven to a large extent by the macroeconomic recoveries as well as on account of
rapid changes in the technology (Gupta & Banerjee, 2017). Vast volumes as well as amounts of
transactions with regard to the same exceeded records during the middle part of the 21st century on
account of numerous reasons, for increasing profitability levels, cost reductions, and operational
efficiencies (Gupta & Banerjee, 2017).
Decisions with respect to M & A deals necessitate serious level of focus as well as attention to be laid
while the companies undertake acquisitions as it may impact financial performances pertaining to the
bidder firms (Akben-Selcuk & Altiok-Yilmaz 2011). Wherein these M & As take place, acquiring
companies shall not in all cases be positioned in a profitable manner. It shall impact the overall
managerial, operational, profitability and liquidity related efficiency status relating to acquirer
companies. Business organizations need to pursue M & A’s solely if the same leads to creation of
values. M & A turn fruitful in case the synergies arise in terms of managerial, financial and
operational synergies (Akben-Selcuk & Altiok-Yilmaz 2011).
The various set of research papers and studies in this context illustrate that financial performances
have improved to greater extent over the longer run post the M & As, and in addition there have been
increases in stock prices post the M & A deal. However the financial health concerning the acquirer
firms in rare instances illustrate similar or else better position, while in certain cases it is found that
the buyer is firms involved with the M & A leading to significant levels of decreases with the respect
to financial stability as well as having failed in creating wealth for the shareholders.
1.2. Problem Statement
In the context of the research background presented, it becomes highly essential for studying the
impacts of M & A over the financial performances pertaining to corporate organization. Instead of
considering them as a solely strategic form of tool, it becomes significant for establishing the impacts
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from M & A over solvency, profitability, liquidity, and valuations. By way of assessing the financial
performances by way of financial ratios as well as firm valuations of publicly listed business
organizations in Middle East, this research shall determine if the M & As impact the abilities of these
organizations in meeting their obligations over short term / long term as well as being stable and
profitable.
Various studies undertaken to study the efficacy of M & A (Kling, 2006; Selvam et al 2009) offer
evidences that illustrate positive impacts from corporate M & As irrespective if industry or region.
Although, it is also crucial for noting that the M & A deals have capabilities for leading to adverse
effects as has been suggested in various studies (King et al, 2004; Yeh and Hoshino, 2002; Yook,
2004; Ismail et al, 2010).
In this context, this research project shall aim in filling the gap within academia through
investigations over effects of M & As over the solvency, liquidity, profitability, and valuations
pertaining to the business organizations that are listed publicly in Middle East.
1.3. Aims & Objectives
The specific objectives of this research study includes the following,
I. Review of M & As in Middle East region business environment
II. Identify the impact of M & As in merged entities that are publicly listed in Middle East in
terms of financial performances relating to profitability, solvency, liquidity and operational
efficiencies using financial ratio analysis.
III. Identify the impact of M & As in merged entities that are publicly listed in Middle East in
terms of value creation for shareholders using firm valuations analysis.
IV. Identify and propose the implications of M & As over the short and long term financial
performance of business organizations in Middle East based on the analysis undertaken.
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CHAPTER 2: LITERATURE REVIEW
2.1. Mergers & Acquisitions – Conceptual Overview
Corporate M & A activities represent crucial form of strategies that are implemented for
remaining relevant across the broader business domain (Cartwright & Cooper 2012; Gomes
et al 2011; McCarthy & Dolfsma 2012). Various set of theories which lead to the undertaking
of M & A related initiatives are affiliated to the free cash flow theory, theory of oligopolistic
reaction as well as the size & return to scale theory. Although, the M & A activities could
originate from that of non-value maximization behavior with respect to the concerns
managers at the company undertaking the acquisition (Cartwright & Cooper 2012; Gomes et
al 2011; McCarthy & Dolfsma 2012). As these manager are not essentially prompted from
that of managerial discipline related motivations, these forms of mergers fail to cause any of
the layoffs with respect to the incumbent management of the target companies (Cartwright &
Cooper 2012; Gomes et al 2011; McCarthy & Dolfsma 2012). Although, mergers of these
nature are in general harmful with respect to shareholders over the interests pertaining to
managers who are actually supposed to effectively act as Managers acting for maximizing
the value concerning shareholders needs to be distributes all of the free cash flow towards
them (Cartwright & Cooper 2012; Gomes et al 2011; McCarthy & Dolfsma 2012).
Free Cash Flow Theory
The diversion of the free cash flow arising from the shareholders paves way for the managers
in avoid to have the usage of the capital markets while the same are in requirement of fresh
capital, that is, the same essentially allows for them in avoiding the overall monitoring that
are affiliated with that of newer equity related issues (Cartwright & Cooper 2012; Gomes et
al 2011; McCarthy & Dolfsma 2012). In addition, by way of diverting the free cash flow the
concerned managers could increase the overall size pertaining to the specific company,
which in turn enhances their respective power as well as their ability for earning, a well as
reducing the risk of take-over (Cartwright & Cooper 2012; Gomes et al 2011; McCarthy &
Dolfsma 2012). There are overall conflicts over interests affiliated with the free cash flow
distributions amongst the managers as well as the related shareholders who are effectively
supposed in being represented (Cartwright & Cooper 2012; Gomes et al 2011; McCarthy &
Dolfsma 2012).
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One of the ways, the managers could divert the free cash flows through dividends are by way
of issuing debts as well as consequently binding themselves for paying out the future cash
(Cartwright & Cooper 2012; Gomes et al 2011; McCarthy & Dolfsma 2012). The theory
essentially prompts the overall needs for improving the financial performances pertaining to
firms by way of the M & A activities (Cartwright & Cooper 2012; Gomes et al 2011;
McCarthy & Dolfsma 2012). Return over the shareholder equity are impacted when the
managers essentially divert free cash flow through dividends and thus consequently
impacting the financial performances concerning the specific company (Aurora et al 2011;
Anderson et al 2012; McCarthy 2011). The same is on account of the fact that measures
concerning return over equity pertaining to the profitability of corporations through the
revealing of the extent buy which profit concerning the company shall generate through the
funds that are invested by way of the shareholders (Aurora et al 2011; Anderson et al 2012;
McCarthy 2011).
Oligopolistic Theory
In terms of the overall framework pertaining to the oligopolistic market, merger activities
could in addition result on account of what can be suitably described in being behavior
representing the oligopolistic reaction (Aurora et al 2011; Anderson et al 2012; McCarthy
2011). This oligopolistic reaction can be defined as the corporate behavior through which the
rival firms within the specific industries made up of few larger organization actually counter
the moves of one another through the undertaking of similar set of moves by themselves
(Aurora et al 2011; Anderson et al 2012; McCarthy 2011). Hence, in case two of the firms
within the oligopolistic form of industry actually merge, the others may react through the
mergers as a reaction, in an independent manner of whether these shareholders shall gain or
else lose on account of the same (Aurora et al 2011; Anderson et al 2012; McCarthy 2011).
The overall behavior thus explained with respect to oligopolistic reaction can result in the
chain of consequent mergers in taking place, and in consequence could later on aid the
explaining of empirical evidences which may seem in illustrating that these mergers take
place in terms of waves (Aurora et al 2011; Anderson et al 2012; McCarthy 2011).
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Size & Return to the Scale Theory
Benefits with respect to size are in the usual sense source of the synergies. The same refers to
positive forms of incremental net gains that are affiliated with that of combinations
concerning the two firms by way of mergers or else acquisitions (Aurora et al 2011;
Anderson et al 2012; McCarthy 2011). In case, say, firm A makes acquisition of firm B in
lieu of cash. These synergies or else overall gains with respect to value concerning the
respective shareholders pertaining to A as well as B refers Synergy equivalent to VAB – (VA
+ VB). In case the resulting synergy has a positive value, subsequently the overall
combination pertaining to these two firms (“VAB”) are much more valuable as against the
aggregate of these separate entities (Aurora et al 2011; Anderson et al 2012; McCarthy
2011). As has been understood from the respective first principles in finance, overall value
pertaining to assets are the present values concerning the discounted future cash flow. This
cash flows deriving from the synergy refer to Δ CF(t) being equivalent to CFAB(t) – (CFA(t)
+ CFB(t)] (Aurora et al 2011; Anderson et al 2012; McCarthy 2011). In case of positive
value, then combined form of the firm results over greater levels of cash flow as compared to
the aggregate sum of separate set of firms. In case no value are resulting from the overall
combination pertaining A as well as B, that is, synergy is equivalent to 0, then specific
merger is zero sum form of game as well as the gains towards shareholders of B are
equivalent to the costs concerning the shareholders of A. In case VAB is greater than (VA +
VB), then both these parties could benefit (Aurora et al 2011; Anderson et al 2012; McCarthy
2011).
With respect to the economies in scale with respect of average costs declining in relation to
the larger size. Larger sized firms possess more ability for implementing the specialization.
The combined firm could operate in a more efficient manner as compared to two of the
separate firms (Bena & Li 2014; Grabowski & Kyle 2012; Cooper & Finkelstein 2014;
Galpin & Herndon 2014). The firm could attain greater levels of operating efficiencies over
several set of varied ways by way of mergers or else through acquisitions. Economies in
scale relates with respect to average costs for each unit in producing the goods as well as
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services. In case the each unit costs for production fall with the levels of increases in
production, then the economies in scale prevails (Bena & Li 2014; Grabowski & Kyle 2012;
Cooper & Finkelstein 2014; Galpin & Herndon 2014). When the companies actually merge,
the overheads shall be reduced as well as the operational efficiencies are improved as there
are sharing with respect to central facilities like that of computer services, staff, top
management and corporate headquarters. By way of economies across vertical integration,
vertical mergers result in easier form of coordination that are closely to the operating
activities (Bena & Li 2014; Grabowski & Kyle 2012; Cooper & Finkelstein 2014; Galpin &
Herndon 2014).
Classification of the M & A
Various studies in this context have undertaken the classification of M & A activities as three
different categories which include the portfolio M & As, financial form of M & As as well as
organizational M & As (Bena & Li 2014; Grabowski & Kyle 2012; Cooper & Finkelstein
2014; Galpin & Herndon 2014). The portfolio M & As essentially entails the significant form
of changes over the mix of assets pertaining to the specific firm or else lines of businesses
which the specific firm operates, encompassing spin-offs, asset sales, divestitures, and
liquidation. Financial form of M & As includes the changes with respect to capital structure
concerning the firm, comprising debt equity swaps, leveraged recapitalization, and, leverage
buyouts (Bena & Li 2014; Grabowski & Kyle 2012; Cooper & Finkelstein 2014; Galpin &
Herndon 2014). The widely renowned way to undertake financial form of M & As are
increasing equity by way of issuing newer set of shares. The organizational form of M & As
involves the significant form of changes with respect to organizational structure relating to
firm includes the redrawing concerning the divisional boundaries, hierarchic levels related
flattening, dispersal of the relevant span in control, reduction of product level diversification
that revises compensation, reformation of the corporate governance as well as downsizing of
employment (Bena & Li 2014; Grabowski & Kyle 2012; Cooper & Finkelstein 2014; Galpin
& Herndon 2014). The other set of categories that are accepted commonly include the
following,
Horizontal Merger
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The same represents the merger amongst companies within same industry as well as shares
the product / service lines as well as markets that are same (Bena & Li 2014; Grabowski &
Kyle 2012; Cooper & Finkelstein 2014; Galpin & Herndon 2014). Horizontal mergers
essentially are widely common across industries having fewer firms, with the competition
tending to have higher as well as potential gains across market share possess much vaster
potential for the merging firms across the industry (Bena & Li 2014; Grabowski & Kyle
2012; Cooper & Finkelstein 2014; Galpin & Herndon 2014).
Vertical Merger
The merger amongst two of the companies which produce varied set of goods / services with
respect to one particular finished product (Bena & Li 2014; Grabowski & Kyle 2012; Cooper
& Finkelstein 2014; Galpin & Herndon 2014). The vertical merger shall take place amongst
two or else more firms that operate across varied levels within the supply chain of an
industry. The underlying logic that lies behind this form of mergers are in increasing the
overall efficiency (Bena & Li 2014; Grabowski & Kyle 2012; Cooper & Finkelstein 2014;
Galpin & Herndon 2014).
Conglomerate
The same refers to the merger amongst the firms which possess none of the business areas
that are common (Bena & Li 2014; Grabowski & Kyle 2012; Cooper & Finkelstein 2014;
Galpin & Herndon 2014). There are essentially two forms of this conglomerate mergers, pure
as well as mixed. In case of pure form of conglomerate mergers, the same involves the firms
having nothing amongst them to be common, whilst mixed form of conglomerate mergers
comprise firms which are seeking in essence market extensions or else product extensions
(Bena & Li 2014;...