Impact of Mergers and Acquisitions on Stakeholders' Wealth

Table of Contents
Introduction ......................................................................................................................... 1

Background of the Topic ................................................................................................. 2

Research rationale: .......................................................................................................... 3

Research hypothesis: ....................................................................................................... 3

Literature Review................................................................................................................ 4

Motives for Mergers & Acquisitions - A Dual Perspective: ........................................... 5

Methodology ..................................................................................................................... 11

Quantitative research: .................................................................................................... 11

Research Design ............................................................................................................ 11

Research Hypotheses..................................................................................................... 11

Sample and Data Collection .......................................................................................... 12

Data Analysis Method ................................................................................................... 13

Justification of the Methodology................................................................................... 14

Analysis: ........................................................................................................................... 15

Correlation:.................................................................................................................... 15

Firms size and Share price: ...................................................................................... 16

Firm performance and share price: ............................................................................ 17

Regression: .................................................................................................................... 19

Firm size and share price: .......................................................................................... 19

Profitability and share price:...................................................................................... 23

Conclusion: ....................................................................................................................... 26

References ......................................................................................................................... 28
Introduction

As the global competition increases, the corporate environment has pushed the companies to an

inadequate situation to persist in this competition. These companies have increased the need for

replication in skills set, resources and capital to improve competitiveness and enunciate

probability. Hence, for the sake of remaining competent and increase their resource pool, firms

strive towards possible mergers and acquisitions (M&As). They are widely recognized as tested

ways for firms and managements to move toward crucial growth and competitiveness.

Acquisitions help the firms in obtaining the necessary capacities, abilities, and resources that are

significant to their performance and business gains. Firms go for acquisitions for mutual benefits,

which are expected to be created in the form corporate synergies. Following the announcement of

any change in the management of the firm, there can be numerous implications impacting the

acquiring shareholders. Shareholders in a firm are significantly impacted by any decision or

announcement of mergers and acquisitions (M&As) as they have their money invested in the firm.

Thus, mergers of companies and acquisitions by firms have a substantial impact on the wealth of

the shareholders. The purpose of the study is to evaluate the impact of mergers and acquisitions

activities influencing the acquiring company shareholder's wealth. This proposed research paper

provides a succinct background of the topic, which is followed by a comprehensive literature

review and the research objectives. A quantitative methodology is suggested which explains the

impact of corporate mergers and acquisitions on the wealth of the acquiring company's

shareholders. The research proposal is presented in a methodical manner with information

arranged in a proper coherent manner.

Background of the Topic

Nowadays, M&As are being extensively used in the corporate sector as an effective tool

for increasing a firms momentous growth. Firms are largely progressing toward such managerial

decisions to augment their competitiveness (Deloitte, 2012). All the sectors, including

pharmaceuticals, information technology, telecommunications, and other traditional industries are

making use of merger and acquisition process. Because shareholder wealth may depend upon the

success of the firms. Significantly, the mergers and acquisitions are crucial aspects for the decision

to select the shareholders (Arslan and Simsir, 2016). The contemporary corporate environment is

fraught with constant changes which necessitate that the firms and their management perform at

their highest potential (Asimakopoulos and Athanasoglou, 2013). This is possible if the firms

resources, capacities, and skills are in abundance. More often, the management of the firms finds

availability of such ongoing resources out of their direct control and boundaries. Hence, they are

required to push their boundaries further and make sure that the capabilities and resources of the

firm are in their control. For this, the managements are forced to decide and avail the benefits that

they might be obtained by combining their potential with similar firms (Moschieri and Campa,

2014). They have to restructure and enter into suitable relationships with other firms for the mutual

benefit and to move toward with a common strategy (Gupta, 2012).

Acquisitions help the firms in obtaining the necessary capacities, abilities, and resources

that are significant to their performance and business gains. Firms go for acquisitions for mutual

benefits, which are expected to be created in the form corporate synergies (Kyriazopoulos and

Drymbetas, 2015). Synergies are the combined force of resources and capacities that are more

beneficial for the corporate performance. They are known to result in greater and efficient

managements, enhancements in the production techniques, and increased market power and share.
 Onikoyi and Awolusi (2014) assert that one of the major implications, when mergers or

acquisitions occur, is related to the shareholders. They are faced with major decisions to make,

whether to sell their stocks to the acquiring company that has acquired or retain their investments.

It is ascertained that shareholders are known to sell their stocks in case of an acquisition when the

chances are good for the sale or when they analyze that the acquired company will not endure on

its own. On the other hand, acquiring companys shareholders are noted to be prepared to pay,

even a high price, in order to acquire shares in the target company when the prospects of financial

benefits are high in the long term (Auerbach, 2013). It is an established argument among the

professionals in the field of mergers and acquisitions that there is no agreement as to who gains a

more financial benefit in the wake of such conditions. According to Arikan and Stulz (2016), in a

short-term view, all the shareholders might have a win-win situation; however, similar cannot be

ascertained for long term perspectives. Hence, the purpose of this research is to address and explore

the impacts of mergers and acquisitions activities on the wealth of the acquiring companys

shareholders.

Research rationale:

In order to evaluate shareholder wealth, total assets and profitability of the companies will be

evaluated. From 2012 to 2016, there were forty companies involved in merger and acquisitions

(see appendices). Among forty companies, the top leading companies have used for this study.

Because top leading companies have potential to compete in the long run and establish the impact

of M & A activities by considering the shareholder wealth. These top ten companies can exhibit

the merger and acquisition activities towards the shareholder wealth maximization in terms of firm

size and firm performance.

Research hypothesis:
Null hypotheses have formulated:

H01: There is an insignificant impact of FS (Firm Size) of the acquiring firm SW

H02: There is an insignificant impact of FP (Firm Profitability) of the acquiring firm SW

Literature Review

The general terms of merging, acquisition and take over can have a different view when compared

to the technical term that can exist. It is significant to determine the merger and acquisition. The

term merging is specified when the organizations gather to merge and spread their resources to

gain a common perspective (Sudarsanam, 1995). The equity investors of the two alternate

organization will form the routine joint ownership. The term acquisition specifies the fixed

purchasing method from one asset to another without disturbing the share investors ownership on

the purchase. The term takes over is to set free from one of the organizations share capital to other

to interchange the currency, temporary shares, loans and so on. The terms defined above are very

important with respect to the context which is to be inherited by the developers and scholars

alternatively.

Mergers and acquisitions are established in different forms and used to innovate some

useful values. Hence it is classified into three major contents like horizontal, vertical and

conglomerate.

1. Horizontal integration- this condition is applied when the organization take up the set

free option within the same industry and at the time of processing the production level

to the company.
 2. Vertical integration- this condition is applied when the targets arise within the same

industry even though the consumer who is operating the different levels of the

production process. This case can be taken up by administrate or the customer.

3. Conglomerate integration- this condition is applied when there are the differences in

targets of the business and it is reached to the consumers in a different form. Hence

because of such reasons, the conglomerate merger need to take some immediate steps

to control the issues. The merger can avoid the risks by manipulating the things like

reducing the cost price and implementing some changes in internal and external

activities.

Mergers and acquisitions are directly or indirectly responsible for creating or destroying the

shareholder's values in the industry, and hence it is even more important to encourage, certify and

understand the complications of the M&A theory. The accurate and appropriate answers for

creating and destroying the shareholder values is the effect of shareholders emerges from different

forms. Merging with financial status and acquisition status and M & A theory address these

aspects.

Motives for Mergers & Acquisitions - A Dual Perspective:

The conflicts between the shareholders and the managers of the target firm arise often even with

their own personal luxury. Hence the tender offers make up the analysis of the organization

conflicts which is formed between the shareholders and the managers of the target firm.

Shareholders wealth:

In context to the acquisition and motives, Sudarsanam (1995) explains the relationship between

the shareholders and the managers of the target firm. The entire decisions of the firm and the

acquisitions are decided by the shareholder wealth maximization perspective. The managers of the
acquiring firm can refuse the acquired firms if they do not have the hope of delivering the best part

of the service with respect to the mergers and the acquisitions activities. The managers of the target

firm could reject the business operations and service of the shareholders firm because the ordered

cost is not sufficient to manage for.

Managerial wealth perspective

The managers of target firm could ask the questions for the present shareholders and the other

firm management to appoint for the position to work for the management (Walking and

Long,1984). The managers of target firm can predict the lag by providing the penalty. This may

lead to risk in increasing the conflicts of the interest. In case, if the self-interest of the acquired

firm misleads, then there may have a risk of poor acquisition and loss of the wealth of the

shareholder firm.

The managers of target firm adopt the acquisitions for the following reasons as explained by the

Sudarsanam (1995). They are:

1. To maintain and strengthen the size of the firm. Salary, status and commanding power are

one of the functioning technique in the firm size. (Empire-building syndrome)

2. To use the technical skills of the firm applied to different places like supply chain

management, human resource management. (self-fulfilment motive)

3. To manipulate the risk of financial issues and decrease the cost price and the bankruptcy.

(job security motive)

4. To be secured from the taken over of the job (job security motive)

The managers of target firm are encouraged by the standard growth of the management as well as

they also request for the assurances of job security. Without taking the advice from the

shareholders, the managers do not involve any conflicts as they are being the part of the company
and they are also related to their own company. If the company is not satisfied with the manager's

performance, the manager needs to resign the job immediately. As the number of acquisition

increases, the firm size also increases. It also justifies the assumption taking up of managerial skills

helps to increase the welfare of business process.

A usual fight will arise between managers and the shareholders of the target firm. This is because

of the variations that arise at the time of payment clearance which will benefit for the managers

and effects for the shareholders. In reference to the acquisitions, the organization conflicts with

the managers can reduce the shareholder's wealth leading to managers perception in extending the

profit making technique. With respect to this assumption, the managers can lose the repayment

and the interests. In case, if the manager is replaced from the post of successive bidding offer, the

firm needs to recruit professional manager. This research is justified by the authors namely

Walkling and Long (1984) and Martin and McConnell (1991), they have submitted the detailed

explanations of managers changes in the loss of standards. Martin and McConnell further state that

the relationship between the managers and the bidding offers in the market level plays an important

role in minimizing the changes in the managerial level in the huge organization aspects.

In the above explanation, it shows that conflicts that can arise between the wealth perspectives of

both shareholders and the managers. In addition to the wealth maximization levels, the motto and

the assumption of the managers to change the bid may show the impact on the shareholder's values.

Post-Merger Performance Debate (Targets and Bidders)

The main objective of pre-merger activities on shareholders is to make backups in achieving the

targets and the bidden firms. The research explains this concept in the form of three dimensions.

They are-
 1. Shareholders of the target firm will gain the profit in the positive repayments from all the

bid firm (Acquired Company).

2. The acquiring shareholders can gain the profit from the repayments from the tender offers

3. The developing shareholders can even gain the profit from the negative repayments from

mergers. The complete outcome of post-merger performance is kind of mixture of

information.

Franks, Harris, and Titman (1991) conducted the research on the efficient performance level of the

shareholders with respect to the repayments that would arise in the 3 years of the time after the

acquisitions. The poor performance of the pre-acquisitions has occurred because of some technical

errors. It has an insufficient level of standards with respect to Efficient Market Theory (EMH) at

the time of purchase. In the same way, even the shareholder's repayments were not provided within

the period of 3 years.

Some of the research explained the performance level of both merger and the acquisitions in

context to the different forms of merging firms in the presences of security holders. The authors

Dennis and McConnell (1986) conducted the research on Corporate Mergers and Security

Repayments and the outcome showed that the mergers are typically insisted to consider the value

of innovating for terms of both the gained and gaining organizations individually. This result given

out by the above statements meant that the shareholders of acquired firms can get positive

repayments but in general they face some consequences. In addition to this statement, it also

specifies the changeable stockholders who will receive the positive and typical consequences in

repayments of the pre-merger, any how the non-changeable stockholders will receive the positive

terms but not the typical terms in the pre-merger. The entire outcome of the valued performance

let us know about the performance level of the organizations which follow up the mergers instantly
which do not work for the typical consequences to repay for the general shareholders of the gaining

firms. Asquith and Kim (1982) conducted the research on the conclusion of the mergers to provide

the improper repayments to the general shareholders who are in positive and typical standards

level, improper repayments to the general gaining firms who are not set from any different aspects

from the zero level to consider for.

From the viewpoint of the shareholders, the fundamental function of a firms decision to go for

mergers or acquisitions is to create a synergy that is critically related to positive effects on the

wealth of the shareholders in the acquiring firm (Li, 2016). The resultant synergy is considered to

be the combined value of the merged firm. If the combined value is analyzed to be greater than the

value of the acquiring firm alone, the acquisition positively adds to the wealth of the shareholders.

The effects on the wealth of the shareholders occurring as an outcome of mergers and

acquisitions are pertinent debatable discussions among the professionals. Diaw (2014) stated that

value reducing mergers happen when there is an availability of free cash flows. On the other hand,

Cho and Ahn (2016) put up an argument that more often than not, managerial decisions are inclined

toward making investments that significantly increase the managerial value pertaining to the

shareholders but not their returns.

There is an abundance of research on whether the wealth of shareholders increase or

decrease in the wake of a merger or acquisition. A number of empirical studies have been carried

out to explore this matter (Inoti, Onyuma, and Muiru, 2014; Auerbach, 2013; Li, 2016). It has been

an essential topic of concern for the firms and corporations because when managements decide on

acquisitions, there is a lot at stake for the shareholders. Narayan and Thenmozhi (2014) ascertain

that more commonly, the shareholders of the firms that are acquired, receive positive returns on

their investments, that is, positive impacts on their wealth. However, they further state that these
increments are mostly for a short term; as compared to the shareholders of the acquiring firm, who

have to experience a small setback in their investment returns during the first month after the

acquisition. It is ascertained that the value of the acquiring firm is indeed directly related to the

increase in the wealth of the shareholders. Thus, the higher the positive returns on the value of the

firms, the higher will be the increment in the wealth of the shareholders. This is a crucial aspect

occurring as a consequence of mergers or acquisitions. Shareholders thus bear a substantial impact

with regards to increment or reduction in their wealth.

The previous literature further reveals that significant negative returns are reported ranging

from 1% to 5% for a varying time period, but specifically, before the announcements of

acquisitions is shared with the shareholders (Karamanos, Bakatselos, and Roena, 2015;

Kyriazopoulos and Drymbetas, 2015).

The power of research evidence depicts that acquisitions or takeovers by firms clearly bring

some positive returns for the shareholders of the acquired firm but these returns are for a very brief

period of time, mostly right after the acquisition. According to Narayan and Thenmozhi (2014),

cumulatively, the abnormal returns mounting up to the acquiring firm in the years after the

acquisition are usually negative, or are at best; but seldom are they statistically different from zero.

Sharing an estimate, Rani, Yadav, and Jain (2015) suggest that more than 40% of the acquiring

firms are able to achieve positive returns in the following 2 to 3 years after the acquisition.

Bebchuk and Wang (2014) find out that management decisions related to M&As in the

banking sector increase the wealth of shareholders of both the acquirer and acquired firms by

approximately 3%. However, this only happened if managements of both organizations have

focused on their operations to enhance productivity. The literature indicates that other types of

mergers do not necessarily bring about a change in the wealth of the shareholders.
Methodology

In this study, the quantitative research has used to quantify the value of firm assets and firm

performance of acquiring companys shareholders. The researcher aims to contribute to the

existing literature by evaluating the impact of M&As on shareholders wealth.

Quantitative research:

Research strategy answers the how question in the research methodology. It outlines the

method that will be adopted to collect the data and approach toward analyzing it (Eriksson and

Kovalainen, 2015). Depending upon the research inquiry and the research philosophy followed,

there are two main research strategies to choose from quantitative or qualitative. Quantitative

strategy mostly concerns with a statistical analysis of data. It aligns well with positivistic research

philosophy, which primarily deals with some form of numerical analyses (Harrison, 2013). In this

study, quantitative methods are adopted in order to evaluate the problem using statistical tools and

techniques. Moreover, the quantitative approach leads to more reliable and objective results. The

proposed research is explanatory in nature (building causal relationships between the wealth of the

shareholders and mergers and acquisitions).

Research Design

The research design proposed for exploring the impact of M&As on shareholders wealth

is correlational. The design evaluates the statistical relationship between two or more variables.

The main implication and purpose of this research design are to discover and learn the association

between M&A activities of the UK largest acquiring firms and the wealth of the shareholders.

Research Hypotheses
The link between the independent and dependent variable will be analyzed through regression and

correlation. Control variables included in the research are the firm size (total assets) and the firm

performance (profitability). The linear regression model for computing the relationship between

independent and dependent variable. The hypotheses have been developed for the quantitative

analysis. The firm size and firm performance are a significant aspects to evaluate the shareholder

wealth. Firm size refers to total assets and Firm performance refers to profitability ratios of the

company. The linear regression model for computing the relationship between independent and

dependent variable is outlined as follows:

SW = + 1 (FS) + 2 (FP) + e

Where SW stands for Shareholders Wealth, FS stands for Firm Size and FP for Firm Performance

Sample and Data Collection

Companies enlisted on the FTSE 100 index will be included as a sample for the secondary

quantitative research. FTSE 100 index lists the companies of London with highest rates of market

capitalization. The sample size is proposed to be 10, i.e., 10 largest companies who have gone

through mergers and/or acquisitions activities during the years 2012 to 2016 will be included. The

reason for selecting these leading ten companies will exhibit the impact of mergers activities on

shareholders wealth maximization in terms of firm size and profitability. Although, it can be noted

that within the FTSE100 universe we may not have the 10 mergers in the period selected.

The main implication of the secondary data is to collect already researched, investigated,

and published information on the research topic. This helps to get a greater grasp of the information

and from a wide range of sources. Thus, in this case, secondary data is suggested for exploring the

association between M&As and their impacts on the wealth of the shareholders. This would allow

collection of data from a wide variety of authentic sources (Brodie, Ilic, Juric, and Hollebeek,
2013). The suggested resources that will be used in data collection for this research include annual

reports and financial statements of the companies, company websites, and Yahoo Finance,

Morningstar.

Following the random selection of sample companies enlisted on the FTSE 100 index,

annual reports of the firms will be collected for details about mergers and acquisitions. The data

related to companies share prices will be collected from morning star and Yahoo Finance.

Moreover, the data related to the firm size and performance will be extracted from the annual

reports of the listed acquiring firms. This data will be collected from 10 largest firms, FTSE listed

firms for the years 2012, 2013, 2014, 2015, and 2016.

Data Analysis Method

Data analysis method proposed for this secondary quantitative research includes various statistical

methods such as descriptive analysis, correlation, and regression. Based on Alexandrou,

Gounopoulos, and Thomas (2013) study, we use a regression model to evaluate the parameters of

the market model. In his model, they have used logit model and regression model. In this study,

we need to find the relationship between the share price and firm performance and size.

Alexandrou, Gounopoulos, and Thomas (2013) analyzed expected returns and target returns from

the data in the shipping industry. In this study, the link between the independent and dependent

variable will be analyzed through correlation and regression. These statistical analyses method will

help in investigating the hypotheses and answering the research inquiry, that is, the impact of

mergers and acquisitions on shareholders wealth of largest firms. The linear regression model for

computing the relationship between independent and dependent variable is outlined as follows:

SW = + 1 (FS) + 2 (FP) + e

Where SW stands for Shareholders Wealth, FS stands for Firm Size and FP for Firm Performance.
 The results obtained through the correlation and regression is proposed to help determine

the answers to the research aim and inquiry. The research is proposed to be yielding results that

would help the organizations and shareholders in determining the impact of their acquisition and

merger decisions on the share price.

Justification of the Methodology

The quantitative methodology is chosen for this study because of two foremost reasons. It deeply

relates to the main objective of the study. The objective of the study is to investigate the impacts

of mergers and acquisitions activities on the wealth of the acquiring firms shareholders. By

evaluating the above linear regression model, the research objective has determined. Clearly, the

objective requires describing a cause and effect relationship between the said variables. Qualitative

methods usually explore a phenomenon and are utilized for establishing the associations between

the variables under consideration, and not the direction of the association. The quantitative

approach yields concrete data on the basis of empirical information. Quantifying the data and

analyzing it is useful in drawing implications for the practice field. The choice of methodology is

based on extant academic scholarly studies. A literature review of the related scholarly studies

related to our research topic has successfully implemented and utilized secondary quantitative

approaches, employing the regression model (Rani, Yadav and Jain, 2015; Diaw, 2014).
Analysis:

For the given data, the analysis will be determined by using the correlation and regression method.

Correlation is used to quantify to continuous variables. Correlation is a measure of association

between two variables. In correlation, the variables are defined as independent or dependent. The

correlation coefficients are Pearson product moment and Spearman correlation coefficient. The

linear regression model is used to determine the objectives of this study. The reason for selecting

these leading ten companies will exhibit the impact of mergers activities on shareholders wealth

maximization in terms of firm size and profitability. The study uses ten leading companies to attain

the objectives. Because leading companies have the capability to determine the shareholder wealth.

To know the fact of this study, the relationship between the share price and firm assets and share

price and profitability of all these 10 ten largest companies will be evaluated. The ten largest

companies are Croda International, Coco cola, London stock exchange, Provident financial,

Smurfit Kappa Group, Paddy Power Betfair, Persimmon, Mondi Plc, Ashtead Group, Tui AG.

These companies financial data has been obtained from Morningstar websites.

List of ten companies and Year of merger

Order Companies Year of merger

1 Croda International 2012
2 Coco cola HBC 2013
3 London stock exchange 2013
4 Provident Financial 2015
5 Smurfit Kappa Group 2016
6 Paddy Power Betfair 2016
7 Persimmon 2013
8 Mondi Plc 2013
9 Ashtead Group 2013
10 Tui AG 2014
(Source: ftserussell, 2017)

Correlation:
 Correlation is used to quantify the continuous variables. It also used to quantify the

variables like share price & firm size and share price and profitability.

Firms size and Share price:

Firm size is significant for the merger and acquisition study. Here, there need to prove that there

is no significant correlation between the firm size and share price. In order to evaluate the aspect,

the share price of the recent year and the asset turnover ratio for last five years data of ten largest

companies are used. In order to evaluate the correlation between two variables, the average value

of asset ratio and stock price of companies last five years data have taken.

Average value of Asset ratio and stock price of companies

Companies average share price Average asset ratio

Croda international 0.248 0.988

Coco cola 0.778 0.514

London stock exchange, 0.176 0.004

Provident finnacial 0.12 0.538

Smurfit Kappa Group 0.254 0.936

Paddy Power Betfair 0.526 1.322

Persimmon 1.104 0.754

Mondi Plc 0.24 1

Ashtead Group 0.428 0.636

Tui AG 0.037 1.348

(Source: Morningstar, 2017)

In general, companies were flourished in the years of 2012 to 2015. It is observed that most of

the companies are acquired only in the year of 2013 and 2014. After the merger and acquisition

activities, the total assets of each company have been increased every year. Because all the

companies have high value for last three years

Output of Correlation between Share price and total assets

average share price Average asset ratio

average share price 1
Average asset ratio 0.088354917 1

If the correlation value is +1, then it is considered as a positive correlation. If it is -1, it is a negative

correlation. The result of this correlation between share price and profitability is 0.08. Because 0

denotes no correlation. Regarding firm size (FS), almost all companies have insignificant

differences between the total assets and share price. Hence, the null hypothesis is accepted.

Firm performance and share price:

Firm performance refers to profitability. This profitability is used to evaluate the acquiring firms

shareholder wealth. In order to evaluate the shareholder wealth, the correlation between the share

price and profitability ratios of all companies will be determined. These aspects are essential to

determine the value of shareholder wealth. In order to find correlation between two variables,

average value of share price and profitability ratio for last five years have taken.

Average value of Profitability ratios and share price of the companies

Companies average share price Average profitability ratio

 Croda international 0.248 23.25

Coco cola 0.778 6.424

London stock exchange, 0.176 33.362

Provident finnacial 0.12 24.358

Smurfit Kappa Group 0.254 6.268

Paddy Power Betfair 0.526 16.8

Persimmon 1.104 18.776

Mondi Plc 0.24 10.64

Ashtead Group 0.428 22.844

Tui AG 0.037 3.312

Based on order of list with appropriate share price, the result will be determined. London Stock

exchange (3rd in the list) and Paddy power have a greater impact on merger and acquisitions of

shareholders wealth as the value is comparatively low than other companies. Based on the order,

only Paddy power and London Stock change have a higher impact. The value of firm

performance and share price of these two companies are comparatively low throughout five

years. On the other hand, the remaining companies do not have a high impact on the merger and

acquisitions of shareholder wealth as they have average value. Only two companies have a

higher impact which has low values.

(Source: Morningstar, 2017)

 Output of Correlation between Share price and profitability

Average profitability
average share price ratio
average share price 1
Average profitability
ratio 0.061000057 1
If the correlation value is +1, then it is considered as a positive correlation. If it is -1, it is a negative

correlation. The result of this correlation between share price and profitability is 0.06. Because 0

values indicates that there is no correlation between two variables. Hence, there is a no significant

impact on the firm performance (FP) and shareholder wealth (SW). Because 0 denotes no

correlation hence the null hypothesis is accepted.

Regression:

In this study, linear regression model has adopted to evaluate the research hypotheses. The

companys total assets have taken into considerations for this research study. The acquisition only

takes place if the companies losses its assets and liabilities and actually need support to enhance

their performance. The study uses share price makes a comparison with the total assets of

companies. In order to evaluate this, the relationship between total assets and share price will be

evaluated. Generally, shareholder wealth can be evaluated by the share price of the company. Profit

maximization is the significant aspect of the shareholder wealth. Hence, the profitability ratios

have been used to determine the shareholder wealth.

Regression formula:

Firm size and share price:

In order to evaluate this, the asset turnover ratio and share price of the companies have taken.

The below table represents the share price and turnover ratio of all ten companies.
 Asset ratio (2012 -2016) and present stock price of companies

Companies share price 2012 2013 2014 2015 2016

Croda international 0.27 1.05 1.07 1 0.92 0.9

Coco cola 0.75 0.57 0.53 0.51 0.49 0.47

London stock exchange, 0.18 0.01 0.01 0 0 0

Provident finnacial 0.1 0.62 0.62 0.53 0.47 0.45

Smurfit Kappa Group 0.28 0.87 0.96 0.96 0.95 0.94

Paddy Power Betfair 0.55 1.4 1.42 1.45 1.78 0.56

Persimmon 1.14 0.64 0.72 0.81 0.81 0.79

Mondi Plc 0.25 0.95 1.01 1.02 1.06 0.96

Ashtead Group 0.43 0.65 0.66 0.66 0.62 0.59

Tui AG 0.02 1.37 1.39 1.36 1.42 1.2

Estimated equation for linear regression model to evaluate stake holder wealth:

SW = + 1 (FS) + 2 (FP) + e

Here, alpha and beta values are obtained from linear equation.

SW= 0.08+ (0.45) (0.27) + (0.45) (0.9)

=0.08+0.12+0.4

=0.60

Hence the value of shareholder wealth for the 1st company is 0.60. Similarly, we need to

calculate for all other companies. This can be obtained by using the regression equation. 0.60
denotes 60% of the shareholder wealth related to firm size and firm performance of the company.

But the study is to evaluate the significant impact between these two variables.
(Source: Morningstar, 2017)

Output of Regression analysis for given data

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.9172427
R Square 0.8413342
Adjusted R Square 0.6430019
Standard Error 0.2021308
Observations 10

ANOVA
Significance
df SS MS F F
Regression 5 0.8665826 0.1733165 4.2420431 0.093196
Residual 4 0.1634274 0.0408569
Total 9 1.03001

Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.3813896 0.1702279 2.2404644 0.0885763 -0.0912389 0.8540182 -0.0912389 0.8540182
2012 3.6243637 2.6005159 1.3937095 0.235848 -3.5958259 10.844553 -3.5958259 10.844553
2013 -12.997863 4.1525564 -3.1300871 0.0351823 -24.527208 -1.4685183 -24.527208 -1.468518
2014 15.718697 4.3924203 3.5785959 0.0231968 3.5233832 27.914011 3.5233832 27.914011
2015 -4.7187148 2.0395569 -2.313598 0.0817088 -10.381433 0.944003 -10.381433 0.944003
2016 -1.5334747 0.8583709 -1.7864943 0.148556 -3.9166944 0.849745 -3.9166944 0.849745

The results predict that there is no significant relationship between the share price and firm assets.

As the intercept p-value is 0.08. The relationship will become true only if the value is less than

0.05. Hence, the result clearly illustrates that there is no significant between these two variables.

In the detailed analysis, 2013 (0.03) and 2014 (0.02) have the low impact of merger and acquisition

activities which significantly affects the acquiring firm of shareholder's wealth because the p value
of both years is less than 0.05. The low impact determines that merger and acquisition activities

do not affect the shareholder wealth. Hence, the null hypothesis is accepted.

Linear Regression chart

Total assets and share price

1.2

0.8

0.6

0.4 y = -0.0883x + 0.4575

R = 0.008
0.2

0
0 0.2 0.4 0.6 0.8 1 1.2 1.4

The above linear graph indicates that there is no significant difference between the total assets and

share price. There is a negative relationship between these two variables. The line indicates the

exact possibility between total assets and share price. The value of R square has become 0.008

which indicates that there is no possibility to make the relationship as linear.

Profitability and share price:

For this evaluation, the profitability ratios of all ten companies will be considered. The impact of

a firm performance (profitability) towards share price will be evaluated.

 Profitability ratios (2012-2016) and present share price of the companies

Companies share 2012 2013 2014 2015 2016

price

Croda international 0.27 22.78 23.42 22.91 23.68 23.46

Coco cola HBC 0.75 5.56 5.17 6.73 6.57 8.09

London stock exchange, 0.18 50.24 40.39 27.58 24.5 24.1

Provident financial 0.1 27.5 17.96 21.58 25.64 29.11

Smurfit Kappa Group 0.28 4.09 4.49 7.04 7.35 8.37

Paddy Power Betfair 0.55 21.3 18.93 18.9 16.63 8.24

Persimmon 1.14 12.66 16.28 18.36 21.78 24.8

Mondi Plc 0.25 6.68 8.45 11.81 12.51 13.75

Ashtead Group 0.43 14.57 20.54 21.87 29.54 27.7

Tui AG 0.02 2.43 2.87 3.4 3.71 4.15

(Source: Morningstar, 2017)

Output of Regression analysis for given data

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.5612935

R Square 0.3150504

Adjusted R Square -0.5411365

Standard Error 0.4199717

Observations 10

ANOVA
Significance
df SS MS F F
Regression 5 0.3245051 0.064901 0.3679692 0.8488877
Residual 4 0.7055049 0.1763762
Total 9 1.03001
 Standard Lower Upper
Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 0.1221244 0.407514 0.2996814 0.7793474 -1.0093158 1.2535645 -1.0093158 1.2535645
2012 -0.0479967 0.039399 -1.2182222 0.2900788 -0.1573857 0.0613923 -0.1573857 0.0613923
2013 0.0239191 0.061482 0.3890427 0.7170672 -0.1467823 0.1946206 -0.1467823 0.1946206
2014 0.1047339 0.1408276 0.7437028 0.4983672 -0.2862663 0.4957341 -0.2862663 0.4957341
2015 -0.0828812 0.1181162 -0.7016918 0.5215503 -0.4108245 0.2450621 -0.4108245 0.2450621
2016 0.0261031 0.0522532 0.4995505 0.6436197 -0.1189749 0.1711811 -0.1189749 0.1711811

The results predict that there is no significant relationship between the profitability and

share price. Because of the intercept value of these variables, the value becomes 0.77. It will be

insignificant only if the p value is less than 0.05. In a detailed analysis, all five years have a high

impact on merger and acquisitions activities which influence the shareholder's wealth as the p

value is greater than 0.05. The higher impact determines the effect of merger and activities do not

influence the shareholder wealth. Hence, the null hypothesis is accepted

Linear Regression chart

Profitatbility and share price

1.2

0.8

0.6
y = 0.0025x + 0.3543
0.4 R = 0.0049

0.2

0
0 5 10 15 20 25 30 35
The above linear graph indicates that there is no significant difference between the profitability

and share price. There is a negative relationship between these two variables. The line indicates

the exact possibility between total assets and share price. The value of R square has become 0.0049

which indicates that there is no possibility to make the relationship as linear. R-squared is a

statistical measure of how close the data are to the fitted regression line. It is also known as the

coefficient of determination, or the coefficient of multiple determinations for multiple regressions.

0% indicates that the model explains none of the variability of the response data around its mean.

For the above analysis, all the hypotheses have been proved. The null 1st hypothesis has been

accepted and stating that there is no significant impact on merger and acquisition activities, firm

size (FS) whereas, on the other hand, the 2nd hypothesis has been accepted as it clearly indicates

that the firm performance does not influence the acquiring company shareholder's wealth (SW).

Conclusion:

The motives behind merger and acquisition were planned to expand the market. Other significant

motives are diversification, vertical integration, technology acquisition etc. This study clearly

explains that the variables firm assets and share price do not have a significant relationship between

the activities of M & A and shareholders wealth. It also made clear that a firm performance does

not create a significant impact on shareholders wealth. Vertical integration and abnormal returns

are the significant aspects which can be evaluated in the future study. M & A are least favored by

the market and destroys the shareholder's wealth. Only acquiring advanced technology has the

chances of enhancing the competitiveness of the firm. A high technology industry has been serving

as the main driving force in the UK. M & An offer all corporations with cost efficient and faster

way of acquiring high advanced technology. This would need a length of time and expenditures to

create in-house. Vertical integration of M & A involves the firm business which will be considered
as difficult task especially in human resources. Care should be considered to determine the

effectiveness of merger and acquisitions in enhancing the efficiency of the company. The effects

on efficient do not depend on the short term returns. The insignificant between the accounting

performance and stock prices indicates that potential synergies through mergers may exist. The

existence of these potential synergies does not have any guarantee of the combined operation. The

business environment and market changes will be affected by deteriorating the post-merger

performance. The industries are focusing on integration issues due to the unsatisfactory

consequences of past mergers. Corporations are aware of the complex activity of successfully

incorporating two firms with distinct business cultures like labor unions, compensation, and

promotion and organization structure. Mergers may also undermine employee morale. Difficulties

in dealing with these issues can impede a merger that has potential synergy. One important

implication for further research concerning M&As is to take the integration issues into

consideration along with the human factors.

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Appendices:

(Source data: ftserussell, 2017)

List of mergers 2012 to 2016

Date Added Deleted Notes

19-Mar-12 Croda International Cairn Energy
19-Mar-12 Aberdeen Asset Management Essar Energy
18-Jun-12 Babcock International Group Man Group
29-Jun-12 Pennon Group International Power Corporate Event - Acquisition of International
Power by GDF Suez S.A.
24-Sep-12 Melrose ICAP
24-Sep-12 Wood Group (John) Ashmore Group
24-Dec-12 TUI Travel Pennon Group
18-Mar-13 Easyjet Intu Properties
18-Mar-13 London Stock Exchange Group Kazakhmys
24-Jun-13 Persimmon Evraz
24-Jun-13 Travis Perkins Polymetal
23-Sep-13 Coca-Cola HBC AG Wood Group (John)
23-Sep-13 Sports Direct International Eurasian Natural Resources
Corporation
23-Sep-13 Mondi Serco Group
23-Dec-13 Royal Mail Croda International
23-Dec-13 Ashtead Group Vedanta Resources
24-Mar-14 Barratt Developments Amec
24-Mar-14 St. Jamess Place Tate & Lyle
23-Jun-14 3i Group Melrose Industries
23-Jun-14 Intu Properties William Hill
22-Sep-14 Direct Line Insurance Group Barratt Developments
22-Sep-14 Dixons Carphone Rexam
17-Dec-14 TUI AG TUI Travel Corporate Event - Acquisition of TUI Travel by TUI
AG
22-Dec-14 Barratt Developments IMI
22-Dec-14 Taylor Wimpey Petrofac
20-Mar-15 Hikma Pharmaceuticals Tullow Oil
13-Apr-15 Merlin Entertainments Friends Life Group Corporate Event - Acquisition of Friends Life
Group by Aviva
22-Jun-15 Inmarsat Aggreko
21-Sep-15 Berkeley Group Holdings Weir Group
21-Dec-15 Worldpay Group G4S
21-Dec-15 Provident Financial Morrison (Wm) Supermarkets
21-Dec-15 DCC Meggitt
21-Mar-16 Paddy Power Betfair Smiths Group
21-Mar-16 Mediclinic International plc Hikma Pharmaceuticals
21-Mar-16 Morrison (Wm) Supermarkets Aberdeen Asset Management
21-Mar-16 Informa Sports Direct International
20-Jun-16 Hikma Pharmaceuticals Inmarsat
19-Sep-16 Polymetal International Berkeley Group Holdings
19-Dec-16 ConvaTec Group Travis Perkins
19-Dec-16 Smurfit Kappa Group Polymetal International