Essay: Overall performance of two companies pre merger and post merger

This study focuses on the overall performance of two companies pre merger and post merger. The analysis of the performance of the company before and after the merger enables us to draw a conclusion whether the merger has been favourable to the company or not.
Mergers and Acquisitions are a topic of global significance nowadays. Mergers and Acquisitions have become a common corporate strategy in the recent past enabling the organizations to achieve synergy benefit and sustainable development. They are spoken about so much all over the globe in recent times. These Mergers and Acquisitions are not of a recent origin but have been in practice since 18th century. This project gives an insight on Mergers and Acquisitions (M&A) through a comparative study on the pre merger and post merger analysis of Arcelor and Mittal Steel from a finance perspective. Mittal Steel merged its operations with Arcelor in 2006 and it was regarded as the biggest merger in the world steel industry. For the purpose of our study we have considered Mittal Steel’s acquisition of Arcelor and have made the pre merger and post merger analysis of the same to arrive at conclusions. The objective of this study is to arrive at a conclusion whether the merger has been successful or not in terms of both profit as well as wealth maximization. This study will take into consideration the merger of Arcelor and Mittal Steel and analyse their performances before and after the merger and decide whether they have been able to achieve success after the merger and also whether the companies have been able to achieve synergy benefit which is one of the primary reasons for a merger to take place. This study also analyses the success of the merger in terms of market share and the capacity utilization. This project has made use of secondary data and the facts and figures are reliable to the best of our knowledge. The various financial techniques used in this study are trend analysis, ratio analysis, cash flow statement and fund flow statement. The conclusions of this study cannot be used to generalize regarding the fate of Mergers and Acquisitions. This study strongly recommends further research on this topic in the future.
• To carry out a comparative analysis depicting the pre and post merger performance of ArcelorMittal.
• To arrive at a conclusion whether the merger has been successful or not in terms of both profit as well as wealth maximization.
• Mergers and Acquisitions have become a common corporate strategy in the recent past enabling the organizations to achieve synergy benefit and sustainable development.
• Studying and analyzing the overall performance of the company pre and post merger, enables us to draw a conclusion whether the merger has been beneficial to that particular company.
• This study will take into consideration the merger of Arcelor and Mittal Steel and analyse their performances before and after the merger and decide whether they have been able to achieve success after the merger and also whether the companies have been able to achieve synergy benefit which is one of the primary reasons for a merger to take place.
• This study also analyses the success of the merger in terms of market share and the capacity utilization.
• This study concentrates exclusively on the merger of two companies Arcelor and Mittal Steel and their performances pre and post merger.
• All the mergers may not necessarily be successful and hence by the conclusion arrived at the end of this study, it would not be possible to draw a generalization to say whether the mergers are successful for all the companies.
• This study is made without the aid of primary data and by relying on the secondary data which may be regarded as a limitation to the study.
As an outcome of globalisation of businesses all over the world, the rivalry between the small and the large companies as been amplified. The mergers and acquisitions is one of the salient activity in the present business world which has been adopted repeatedly by organisations for attaining the desired targets like beating the market, growth and to keep their business going. Characteristics like the different situation under which mergers takes place or the type of merger and other situation specific factors are those on which the way the objectives would be realised through Mergers and Acquisitons.
Mergers and acquisitions are used synonymously, but in order to determine whether it is a merger or an acquisiton, there are certain aspects or point of differences that will help us to do so.
Acquistions are interior constituent of corporate scheme. We can say so due to the recognition of Mergers and Acquisition. Synergy realisation is the most stated motive in Acquisition (Gaughan 2002). New market access( ), knowledge transfew ( ) and organisational learning are other objectives.
Acquisitions, help firms to procure a pre-existing perception base of proven value (Empson 2001).
The merger of Arcelor-Mittal is considered to help incorporate the shifting of prices in the steel industry ( The Economic Times, 2006). An addtional characteristic of the merger is that it will develop the consolidation in world steel industry and therefore, it would help the producers of steel to retain the performance constancy through higher efficiencies (Anon., 2008)
Teerikangas and Very (2006) condemned the actuality that loose definitions of Mergers and Acquisitions have resulted in an ill-defined focus in M&A studies. Further Nummela (2005) questions that there is an articulate variation amidst the two concepts.
Firms make use of Mergers and acquisitions to increase their success and growth, seize and also expand,access assets which are expensive to follow, also to decrease the competition, yet majority of the mergers and acquisitions fail to meet their objective (Haleblian, Devers, McNamara, Carpenter, & Davison, 2009).
The operation of the firms should be measured not only in terms of financial aspects but also taking into consideration the non-financial aspects. Most of the studies have a sensation that this may be the cause for them to reckon the failure of mergers. The success or failure is conditional on the purpose for which mergers and acquisitions are done. It would be regarded as a failure if it is impossibe to achieve the target that are set(Rosenweig, 2006). Success is the degree of goal achievement (Bierich, 1988 cited from Brouthers, Hastenburg and Ven, 1998). Nonetheless there are opposed views. A merger is fruitful if it inflates the total current wealth of the owners of acquiring firm with other things being constant(Kumar and Rajib, 2007).
Healy et al. (1992) considered the industry ratios (operating cashflows/total assets) to be the touchstone of effective mergers. On the other hand De Pamphilis(2009) described failure as shutting down of business and sale of business, incapability to meet or exceed financial objectives, non-achievement of strategic objectives. When target firms are liquidity constrained anterior to merger,chances of gain from merger will be stupendous (Kruse et al., 2002). Cost cutting is a greater driver of acquisition success (Kaplan, 1992) as recommended by large sample studies and clinical studies. With regards to the negative returns, Mergers and Acquisitions generate inadequate financial value because they obstruct business performance, damage profits over short-term, drawaway the management and adding not a thing to the book value of new business (Devine, 2007). Cross-Border mergers are often ineffective due to lack of strategy and postmerger integration (Hopkins, 2008).
The testable framework is developed by a research that is previously published,outlined by the part of this paper. The aim of the theory is to examine the company specific elements describing the wealth effects evidenced by competitors following the disclosure of merger between Arcelor and Mittal.
Analysts explain the relationship between the rise in the rivals stock price when there is a disclosure of a merger with that of something good happening in return. Nevertheless there are dissimilar justifications of what this “good” is. They have further quoted theories. They are Collusion theory( Stigler, 1964; Eckbo,1983; Eckbo and Wier, 1985; Mullins et. al., 1995; Sharur, 2004), Buyer power (Robinson, 1933; Galbraith, 1952; Stillman, 1983; Snyder, 1996; Fee and Thomas, 2004) and Productive efficiency (Eckbo, 1983; Stillman, 1983; Sharur, 2004). In the stock markets, these theories have numerous justification for the same event.
The collusion theory (Eckbo, 1985) presumes the number of key players in the industry dwindle when firms experience wealth effects, which makes it simple for companies to develop a cartel(Stigler, 1964; Eckbo, 1983). Academic research earlier carried out found no aid for this theory(Eckbo, 1983; Stillman, 1983; Fee and Thomas, 2004; Sharur, 2004). One possible reason as to why Eckbo and Stigler obtained no support is that the rival companies might have been diversified conglomerates and meagrely affected by an event in the minor industry(McAfee and Williams, 1988). We can have an arguement that the sequence of the end result obtained by Eckbo(1983) and Eckbo and Wier(1985) is unstable with anticompetitive mergers(Schuman, 1989).
This theory assumes that a merger could guide to monopolistic or oligopsonistic competition (Robinson, 1933; Galbraith, 1952).If there are only few buyers and there are many sellers, then the sellers are being paid off by the buyers against eachother. Buyers can then order concessions like reduction in the price, specific delivery times,dates or product varities, threatening to switch to another supplier if the present one does not want to deliver. A merger decleration will result inthe positive wealth impact for the opponent if the theory holds good(Galbraith, 1952; Snyder, 1996; Stillmann, 1983; Fee and Thomas, 2004). Nonetheless the drawback for a victorius oligopsonistic organisationis the number of members involved and the parameters adjusting the suppliers condition.
The final theory is the productive efficiency and information effect theory (Eckbo, 1983; Stillman, 1983; Sharur, 2004) which believes that the wealth effects faced by the rivals are results obtained from the latest information at hand to the market at the time of announcement. However this latest information could contain number of justifications.
The literature has emphasised the importance of certain characteristics that have been categorised into five different areas: acquire, target, deal(Faccio, McConnel and Stolin, 2006), industry or time-period specific. In the case of ArcelorMittal we can say yhat not all of them are easily applicable but can give insights into feasable approache taken. Acquirer-specific factors like market capitalisation, management ownership and accounting numbers in the literature have been utilised substantially to describe and explain the consequence of announcement returns. A final factor effecting announcement returns is the M&A experience of the acquirer, which was found positive in the target industry (Capron and Shen, 2007). They debate that the companies having more experience have the chances to recognise more opportunities, also price them accurately as well as be certain abput their decision in buying private firms, which are tough to value(Capron and Shen, 2007). Nevertheless Capron and Shen (2007) also record the the factors that has a negative repercussions on the returns. Age of the company, target size when not in contrast with the acquirer size and also whether the company has intangibles in particular. These factors seem reasonable. Hostility of target management can also be spotted negative in Schwert (2002), while not noteworthy in Moeller, Schlingemann and Stulz (2005). The Arcelor-Mittal merger was completely political (The International Herald Tribune, February 21st, 2006. p. 3), with target management for which the European politicians bravely oppsed the deat at the start. The political factors is important here as they were in the Citicorp-Travellers merger (Otchere and Mostopo, 2007), and they should certainly be taken into consideration.
The positive factors stated by Capron and Shen (2007) dealt with whether the target was profitable prior to merger and whether it was based on the United States. According to their research both the location or market choice and profitability are primary factor for the acquirer and target returns.
With merger of Mittal Steel with Arcelor, Laxmi Mittal formed the largest steel maker in the world. This merger was sleek. The procedure displayed how the acquisition price could be immensely increased in favour of the shareholders of the target,also how some defense mechanisms can rebound. It also had fair share of suspense arising from counter bid and some international intrigue.
Research Methodology
• Types of data source : Secondary Data
• Tools for collecting Secondary Data
o Document Review
o Company Annual Reports
o Observation
o Web Search
o Journals
• Financial tools used: Various financial tools have been used for the study. Some of them are:
o Percentage Analysis
o Ratio Analysis
Ratio analysis is a widely used tool of financial analysis. The term ratio in it refers to the relationship expressed in mathematical terms between two individual figures or group of figures connected with ♣ each other in some logical manner and are selected from financial statements of the concern.
♣ The ratio analysis is based on the fact that a single accounting figure by itself may not communicate any meaningful information but when expressed as a relative to some other figure, it may definitely provide some significant information.
♣ The relationship between two or more accounting figures/groups is called a financial ratio.
♣ A financial ratio helps to express the relationship between two accounting figures in such a way that users can draw conclusions about the performance, strengths and weaknesses of a firm. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future.
o Income Statement Analysis
♣ The income statement is basically the first financial statement you will come across in an annual report or quarterly Securities And Exchange Commission (SEC) filing.
♣ It also contains the numbers most often discussed when a company announces its results – numbers such as revenue, earnings and earnings per share. Basically, the income statement shows how much money the company generated (revenue), how much it spent (expenses) and the difference between the two (profit) over a certain time period.
♣ When it comes to analyzing fundamentals, the income statement lets investors know how well the company’s business is performing – or, basically, whether or not the company is making money.
♣ Generally speaking, companies ought to be able to bring in more money than they spend or they don’t stay in business for long. Those companies with low expenses relative to revenue – or high profits relative to revenue – signal strong fundamentals to investors.
♣ You can gain valuable insights about a company by examining its income statement.
♣ Increasing sales offers the first sign of strong fundamentals. Rising margins indicate increasing efficiency and profitability. It’s also a good idea to determine whether the company is performing in line with industry peers and competitors.
♣ Look for significant changes in revenues, costs of goods sold and SG&A to get a sense of the company’s profit fundamentals.
o Balance Sheet Analysis
♣ Investors often overlook the balance sheet. Assets and liabilities aren\’t nearly as attractive as revenue and earnings. While earnings are important, they don\’t tell the whole story. The balance sheet highlights the financial condition of a company and is an integral part of the financial statements.
♣ The Snapshot of Health
The balance sheet, also known as the statement of financial condition, offers a snapshot of a company\’s health. It tells you how much a company owns (its assets), and how much it owes (its liabilities). The difference between what it owns and what it owes is its equity, also commonly called \”net assets\” or \”shareholders equity\”.
The balance sheet tells investors a lot about a company\’s fundamentals: how much debt the company has, how much it needs to collect from customers (and how fast it does so), how much cash and equivalents it possesses and what kinds of funds the company has generated over time.
o Cash Flow and Fund Flow Analysis
• Cash flow statement provides information about the changes in cash and cash equivalents of an enterprise. Cash flow statement is based on the cash concept of profit. Cash flow statement seems to be useful because it identifies cash generated from trading operations, the operating cash surplus which can be applied for investment in fixed assets. Infact a portion of cash from operations is used to pay dividend and tax and the other portion is ploughed back. What can be ploughed back is directly identifiable from cash flow statement. In projected form, this statement is a very useful tool of planning.
• Classification of cash flow activities
a) Operating Activities: These are the principal revenue producing activities of the enterprise. The amount of cash flows from operating activities is a key indicator of the extent to which the operations of the enterprises have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans, and make new investments without recourse to external sources of financing. It provides useful information about internal financing.
b) Investing Activities: These are the acquisition and disposal of long term assets and other investments not included in cash equivalents. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which the expenditures have been made for resources intended to generate future incomes and cash flows.
c) Financing Activities: These are the activities that result in changes in the size and composition of the owner’s capital (including preference share capital) and borrowings of the enterprise. The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.
1. Ethical Considerations
The various ethical principals considered in this research are:
• Honesty: The data, results, methods and procedures, and publication status have been reported honestly. The data hasn’t been fabricated, falsified, or misrepresented.
• Objectivity: With regard to experimental design, data analysis, data interpretation and other aspects of research where objectivity is expected, bias has been avoided.
• Carefulness: Careless errors and negligence has been avoided to the extent possible; The research has been carefully and critically examined. Good records of research activities, such as data collection, research design, and correspondence with agencies or journals has been maintained.
• Openness: The data, results, ideas and resources have been shared. I would also like to submit that I am open to criticism and new ideas.
• Respect for Intellectual Property: Unpublished data, methods, or results without permission haven’t been used. Proper acknowledgement or credit for all contributions to research has been given. There is no plagiarism.
The collusion theory (Eckbo, 1985) presumes the number of key players in the industry dwindle when firms experience wealth effects, which makes it simple for companies to develop a cartel(Stigler, 1964; Eckbo, 1983). Academic research earlier carried out found no aid for this theory(Eckbo, 1983; Stillman, 1983; Fee and Thomas, 2004; Sharur, 2004). One possible reason as to why Eckbo and Stigler obtained no support is that the rival companies might have been diversified conglomerates and meagrely affected by an event in the minor industry(McAfee and Williams, 1988). We can have an argument that the sequence of the end result obtained by Eckbo(1983) and Eckbo and Wier(1985) is unstable with anticompetitive mergers(Schuman, 1989).
This theory assumes that a merger could guide to monopolistic or oligopsonistic competition (Robinson, 1933; Galbraith, 1952).If there are only a few buyers and there are many sellers, then the sellers are being paid off by the buyers against each other. Buyers can then order concessions like reduction in the price, specific delivery times,dates or product varieties, threatening to switch to another supplier if the present one does not want to deliver. A merger declaration will result in the positive wealth impact for the opponent if the theory holds good(Galbraith, 1952; Snyder, 1996; Stillmann, 1983; Fee and Thomas, 2004). Nonetheless the drawback for a victorious oligopsonistic organisation is the number of members involved and the parameters adjusting the suppliers condition.
The final theory is the productive efficiency and information effect theory (Eckbo, 1983; Stillman, 1983; Sharur, 2004) which believes that the wealth effects faced by the rivals are results obtained from the latest information at hand to the market at the time of the announcement. However, this latest information could contain a number of justifications.
The literature has emphasised the importance of certain characteristics that have been categorised into five different areas: acquire, target, deal (Faccio, McConnel, and Stolin, 2006), industry or time-period specific. In the case of ArcelorMittal, we can say that not all of them are easily applicable but can give insights into feasible approach taken. Acquirer-specific factors like market capitalisation, management ownership and accounting numbers in the literature have been utilised substantially to describe and explain the consequence of announcement returns. A final factor affecting announcement returns is the M&A experience of the acquirer, which was found positive in the target industry (Capron and Shen, 2007). They debate that the companies having more experience have the chances to recognise more opportunities, also, price them accurately as well as be certain about their decision in buying private firms, which are tough to value(Capron and Shen, 2007). Nevertheless, Capron and Shen (2007) also record the factors that have negative repercussions on the returns. Age of the company, targets size when not in contrast with the acquirer size and also whether the company has intangibles in particular. These factors seem reasonable. The hostility of target management can also be spotted negative in Schwert (2002), while not noteworthy in Moeller, Schlingemann, and Stulz (2005). The Arcelor-Mittal merger was completely political (The International Herald Tribune, February 21st, 2006. p. 3), with target management for which the European politicians bravely opposed the death at the start. The political factors are important here as they were in the Citicorp-Travellers merger (Otchere and Mostopo, 2007), and they should certainly be taken into consideration.
The positive factors stated by Capron and Shen (2007) dealt with whether the target was profitable prior to the merger and whether it was based on the United States. According to their research both the location or market choice and profitability are the primary factor for the acquirer and target returns.
With the merger of Mittal Steel with Arcelor, Laxmi Mittal formed the largest steel maker in the world. This merger was sleek. The procedure displayed how the acquisition price could be immensely increased in favour of the shareholders of the target,also how some defense mechanisms can rebound. It also had a fair share of suspense arising from the counter bid and some international intrigue.