Is There A Value Creation For The Shareholder Of The Acquirer In An Acquisition In The Capital-intensive Industries? (Dissertation Sample)

Is there a value creation for the shareholder of the acquirer in an acquisition in the capital-intensive industries?
Abstract
The capital-intensive industries are known to improve the living standard of an economy in the long run. This research is an attempt to understand both the short-term and long-term value creation as a result of an acquisition for the shareholders of the acquirer in three capital-intensive industries- chemicals, metals and oil & gas. For each of these three industries, the largest 5 deals (by value) undertaken in 2014 were analysed. It is known that the acquisition announcement leads to an abnormal short-term returns, which is attributed to the shareholder’s reaction to the acquisition announcement. Prior to conducting the analysis for the short-term value creation, the similarity in the returns across the three industries on a non-acquisition day was analysed, which paved the way for a common analysis for the three industries in short-run. By analysing the change in returns due to the announcements, it was found that on average the returns were negative i.e. value destruction. It is also expected that due to a successful integration after the acquisition, synergy is created which is reflected in the improvement in operating performance metrics. Prior to conducting the analysis for the long-term value creation, the similarity in the capital structure across the three industries prior to the acquisition was analysed, which paved the way for a common analysis for the three industries in long-run. By analysing the change in operating performance due to the acquisition, it was found that on average the performance detoriated i.e. value destruction. Thus, there is a value destruction for the shareholder of the acquirer in an acquisition in the capital-intensive industries.
Table of ContentsIntroduction……………………………………………………………7-11Background to the studyResearch purpose, question and objectivesStructure of the dissertationLiterature Review……………………………………………………12-30TerminologyDrivers of wealth maximizationMeasurement of wealth maximizationInvestment in the capital-intensive industryResearch Methodology………………………………………………31-41Sampling & data collectionResearch approach & analysis techniquesFindings…………………………………………………………….…42-64Short-term value creationLong-term value creationAlignment of the short-term and long-term resultsDiscussion………………………………………………………………65-71Short-term value creationLong-term value creationAlignment of the short-term and long-term resultsConclusion……………………………………………………………72-76Summary of the researchRecommendation to the investors and the managementLimitations of the studyValidity of the studyReferencesAppendix A- Short-term returnsAppendix B- Operating performance metrics
List of Figures
Figure 1: Dissertation structure
Figure 2: Acquisition process
Figure 3: ROCE distribution for capital-intensive industries
List of Tables
Table 1: Data sample for the study
Table 2: Paired samples statistics for chemicals and oil & gas industries
Table 3: Paired samples correlation for chemicals and oil & gas industries
Table 4: Paired samples test for chemicals and oil & gas industries
Table 5: Paired samples statistics for metals and chemicals industries
Table 6: Paired samples correlation for metals and chemicals industries
Table 7: Paired samples test for metal and chemicals industries
Table 8: Paired samples statistics for metals and oil & gas industries
Table 9: Paired samples correlation for metals and oil & gas industries
Table 10: Paired samples test for metals and oil & gas industries
Table 11: Paired samples statistics for pre and post deal announcement
Table 12: Paired samples correlation for pre and post deal announcement
Table 13: Paired samples test for pre and post deal announcement
Table 14: Paired samples statistics for chemicals and metals industries
Table 15: Paired samples correlation for chemicals and metals industries
Table 16: Paired samples test for chemicals and metals industries
Table 17: Paired samples statistics for chemicals and oil & gas industries
Table 18: Paired samples correlations for chemicals and oil & gas industries
Table 19: Paired samples test for chemicals and oil & gas industries
Table 20: Paired samples statistics for metals and oil & gas industries
Table 21: Paired samples correlations for metals and oil & gas industries
Table 22: Paired samples test for metals and oil & gas industries
Table 23: Paired samples statistics for ROE
Table 24: Paired samples correlation for ROE
Table 25: Paired samples test for ROE
Table 26: Paired samples statistics for ROA
Table 27: Paired samples correlation for ROA
Table 28: Paired samples test for ROA
Table 29: Paired samples statistics for ROC
Table 30: Paired samples correlation for ROC
Table 31: Paired samples test for ROC
Table 32: Paired samples statistics for ROCE
Table 33: Paired samples correlation for ROCE
Table 34: Paired samples test for ROCE
Table 35: Paired samples statistics for P/E ratio
Table 36: Paired samples correlation for P/E ratio
Table 37: Paired samples test for P/E ratio
Table 38: Paired samples statistics for DPR
Table 39: Paired samples correlation for DPR
Table 40: Paired samples test for DPR
Table 41: Sample wise short-term and long-term value creation
Table 42: Sample-wise efficiency improvement
Chapter 1- Introduction
1 Background to the study
Mergers and Acquisition (M&A), can be viewed as an apposite tool with the management of the firm, with which they can reallocate the control of the corporate assets of the firm, with the intent of utilizing their assets in the best possible manner (Rossi & Volpin, 2004). The importance of the asset utilization after an acquisition is of high significance, especially in the capital-intensive industries as these industries are characterized by high investments. An acquisition in the capital intensive industry involves the purchase of the fixed assets which is a result of the tradeoff between organically developing the assets and acquiring from another firm, given the constraint of the capital being limited. M&A as a strategic tool is the most preferred financial activity in the 21st century as evident form the 42,300 deals undertaken in 2015, which were valued at 4.7 trillion dollars, demonstrating an astonishing 42% increase from the 2014 levels (Thomson Reuters, 2016). The astonishing number of M&A deals can be explained by the desire to survive in new world market (Vachon, 2007). However, in any M&A it is critical to consider the sufficient value creation for the shareholders of the acquirer, through the exploitation of synergies to justify the premium paid to the acquired firm, and to provide a satisfactory return to their shareholders (Rahman & Lambkin, 2015). The neoclassical theory suggests that the acquisition can be seen as an activity in which the manager works to maximize the shareholders’ wealth (Manne, 1965). In other terms, the process of M&A is consistent across countries, industries and time, which is motivated by the desire to increase the shareholders’ value (Gomez-Dolgan & Tanyeri, 2015). It is estimated that only 25%-30% of all the acquisitions create value for the shareholders of the acquirers, with the bidders earning zero or modest gains (Franks & Harris, 1989). Thus, despite the M&A activities being very popular among the firms of various scale, many times the acquisitions do not produce the expected financial benefits for the acquirer from the acquisition (Stern, 2002). The most evident benefit of the acquisition is not for the shareholders of the acquirer, but for the shareholders of the acquired as they reap a one-off gain from the premium paid to acquire their firm (Andrade et al., 2001).
2 Research purpose, question and objectives
The purpose of this research is to analyze the value creation for the shareholders of the acquirer firms post an acquisition. The sector selected for this research is capital-intensive and three industries are selected- chemicals, metals and oil & gas. This is a secondary research, where the data is collected from various global databases. For the purpose of this study, major acquisition deals in the capital-intensive industries in 2014 are analyzed. The impact on the shareholders’ wealth due to the acquisition is analyzed by using the event study and the operating performance methodologies to measure the short-term and long-term value creation. The research question which the dissertation is attempting to answer is stated as below:
Is there a value creation for the shareholder of the acquirer in an acquisition in the capital-intensive industries?
The widely used measures are based on the stock market returns and the accounting returns (Papadakis & Thanos, 2010). The value creation ove...