Event Study on Ma Deals in Singapore free essay sample

Efficient-markethypothesisMergers and acquisitions (MA) are one of the most important events in corporate finance, both for the firms involved, as well as the economy. Empirical research on these events has revealed a great deal about their trends and characteristics over the last century. Many researchers have addressed the question of gains from acquisitions. Typically, target shareholders earn significantly positive abnormal returns from all acquisitions while acquiring shareholders earn none or negative abnormal returns from mergers. The evidence is usually based on returns computed over a pre-acquisition period starting immediately before the announcement date and ending on or before the effective date. This assumes that prices fully adjust to the likely efficiency gains from acquisitions. Our study attempts to examine the effects of MA announcements on acquiring firms listed on the SGX through the event study methodology. At the same time, we will also to draw insights on the efficiency of the Singapore stock market with relation to MA announcements. This paper starts with a review of past literature, followed by description of our methodology and data, motivations for MA, empirical results of study, and ends with an interpretation of results. 2. REVIEW OF LITERATURE Several studies indicate the presence of large abnormal returns accruing to shareholders of merged firms in the period immediately before the merger. However, evidence suggests that shareholders of acquiring firms earn, on average, no abnormal returns at the acquisitions announcement, though there is tremendous variation in these returns. Researchers have been unable to successfully explain much of this variation, partially because the announcement of a takeover reveals information about numerous things. For example, Grinblatt and Titman (2002) state that the stock return at the time of the bid cannot be completely attributed to the expected effect of the acquisition on profitability, arguing that, the stock returns of the bidder at the time of the announcement of the bid may tell us more about how the market is reassessing the bidders business than it does about the value of the acquisition. Hietala, Kaplan, and Robinson (2001) note that the announcement of a takeover reveals information about the potential synergies in the combination, the stand-alone values of the bidder and target, and the bidder overpayment. They argue that it is often impossible to isolate these effects and, thus, know the meaning of the markets reactions to a takeover announcement. Empirical studies by Keown and Pinkerton (1981), Malatesta and Thompson (1985), and Mikkelson and Ruback (1985) provide some support for the notion of mergers being partially anticipated events. Keown and Pinkerton find that market reactions to mergers occur before the first public announcement of the event, and conclude that â€Å"merger announcements are poorly held secrets and trading on this non-public information abounds†. These earlier studies are of a much larger scale and are generally more descriptive of the American and European equity markets during the merger booms. Our study attempts to supplement research in this area by concentrating on the Singapore market. . METHODOLOGY DATA 3. 1. Event studies methodology The event date is taken to be the first day when publicly available information indicative of the acquirers’ intentions to acquire the companies was released. In most instances, the event date is the day of announcement made by the company. Daily data is used as the market is typically responsive to news on business combinations. For this study, we establish an event period of -30 to +30 trading days. As mentioned, the stock prices of the acquirers and targets typically shift before any publicly information is made available to justify the price changes, and therefore prices of trading days before the announcement date are included in the study to examine these effects. We also establish an estimation period of 90 trading days before the event period (t = -120 to -31) to allow us to capture the relationship between the companies’ stock returns and the market returns prior to the announcement. To measure the abnormal returns, we must first calculate the estimated normal returns of the stocks. This is calculated from using the risk-adjusted return model given by the following formula: Rit = ? + ? Rmt (where Rit = estimated returns during the event period, Rmt = market returns). The estimated returns for each day of the event period are predicted using regression between the return on stock against the return on the market. The abnormal returns for each company are calculated by taking the difference between the actual returns and estimated returns. The abnormal returns are calculated for all trading days during the estimation period and event period. The average abnormal returns (A. A. R. ) are calculated by taking the average of abnormal returns of all companies for each day in the event period and the cumulative average abnormal returns (C. A. A. R. ) by summing up the A. A. R. during the relevant period of study (i. e. the C. A. A. R. of the event period is calculated by summing the A. A. R. from -30 to +30 trading days). Hypothesis testing is run to determine whether the A. A. R. or C. A. A. R. are statistically different from zero. It reveals whether there is statistical evidence that stock returns are affected by the MA announcements. The standard deviation of abnormal returns is calculated from the A. A. R. during the estimation period. As it is estimated from the samples, abnormal returns are assumed to follow a Student t-distribution, with nine degrees of freedom, given the sample size of ten. The t-values are calculated as follows: td = ;tab = 3. 1. 1. Key Assumptions of studies For the purpose of our research, we assume the betas of the companies remain largely constant during the event window, and changes in abnormal returns of the stock are mainly affected by the announcements given the selection criteria used for the samples. 3. 2. Data and Data Source The data analyzed in this study consist of acquisitions and mergers in which the acquiring companies have stocks listed on the Singapore Exchange , and that their stocks continued to be listed in the exchange after the acquisition. A list of business combinations based in Singapore is derived from Thomson One Banker’s database. Market returns are computed from the Morgan Stanley Capital International (MSCI) Singapore (Free) Index . Appendix A shows the component stocks of the index. The index which includes several small and medium-sized firms provides a more diversified selection than the STI index, which consists of only blue-chip stocks. It has a greater fit with the diversified portfolio of samples selected for the event studies. Share prices of the selected samples and MSCI Singapore Free Index are subsequently derived from Thomson One Banker. For this study, ten acquirers are selected from the list of acquisitions. Details of the ten acquisitions are elaborated in Appendix B. For each sample event, we source for news and announcements related to the acquisitions, extracting them from the SGX website, companies’ webpage and archived newspaper reports from Factiva’s database. 3. 3. Selection Criteria for Samples For companies to be qualified in our sample, the acquirers must acquire at least 75% stake of the acquired companies, at one go, in the selected acquisition transactions. A high ownership share grants the acquirers control over the acquired companies, and provides strong support that substantial effort will be undertaken to integrate the operations for the long term such that synergistic benefits can be realized. The acquirers must not own any equity in the acquired companies prior to the acquisitions. This is to avoid potential bias in the results when the market has already incorporated the value of the acquisition into the share price; even a minority stake held in the acquired company may signal future intentions to incorporate the companies. As a result, the market may have already responded accordingly. We avoid acquisition deals with companies that involve government linked companies, due to the fact that government linked companies have less default risk and are thus less reflective of the market volatility. During the event window, there must also be no other announcements or market event, such as the stock market crash of August 1998, as it could have a material impact on the results. The samples are selected from different years, across a wide range of industries. The diversified portfolio of companies will allow us to reduce effects of time-specific and industry-specific bias. Of the cited reasons, one which the market recognizes most significantly is the substantial monopoly gains that the companies stand to gain from the merger and acquisition. The increase in market share and reduction in competition in the market proves to be pertinent in mergers especially the ones involving OCBC – Keppel, UOB – OUB, and UMS Holdings Ltd. To illustrate, the phenomenon of market consolidation in the local banking industry was driven by the need of the banks to expand its markets locally and abroad. Beyond a certain capacity, the banks will need to consolidate to be able to compete within the industry. With the monopoly gains from the acquisitions of OCBC and UOB, they would be able to weed out foreign competition and maintain its market position as the top 3 local banks as today. The gains would also enhance their ability to expand into foreign markets of Malaysia and Greater China. 4. 2. Economies of Scale and Scope The substantial reduction of cost realized from the Economies of Scale and Scope are also one of the main reasons why companies go into mergers. Super Coffeemix – Owl acquisition would enable them to produce their products in larger amounts in the different overseas markets and thus derive substantial cost savings.