Most cos see value erosion after merger & acquisition deals

Of the 54 India companies involved in major (worth over $ 100 million) merger and acquisition deals – outbound, inbound and domestic – since 2005, only eight are doing well in the market.
The current stock prices of these eight are giving positive returns while all others are showing mark-to-market losses and negative returns.
According to a SMC Capital analysis, as of February 9 market prices of only two listed companies that had made acquisitions overseas were in the green. Three companies, which indulged in domestic M&A deals, have also shown mark-to-market profits. Three others that attracted inbound investments also reported positive returns.
Mr Jagannadham Thunuguntla, CEO & Equity Head of SMC Capital, told Business Line the study showed that though majority of the companies saw value erosion of their stocks, the stocks’ performance after the deals was not necessarily a comment on the impact of the events at the operational and fundamental levels. “It is only a reflection of the capital market performance of each stock,” he added.
It is amply borne out in case of BPCL and Videocon’s 50:50 joint venture deals in Brazil’s Encana.
The deals were closed in early 2008. The current MTM performances for BPCL and Videocon are found to be diametrically opposite. While BPCL has moved up 5.6 per cent, Videocon’s return is negative 78.68 per cent.
Acquisition of ACC stake by Holcim and Ambuja Cements by the same company also showed divergent results and underlined the complex relationship between fundamentals and market performance.
On the other hand, NTPC and GAIL, following the 50:50 joint venture deals in Ratnagiri Power, have managed to stay in the green, of course, with varying degrees.
Tata Motors, following the Jaguar-Land Rover deal, has lost 82.04 per cent, while Hindalco has witnessed 76.25 per cent value erosion in it stock after Novelis acquisition. Ranbaxy shed 72.76 per cent after Daichi-Sankyo took control of the company. Tata Steel has seen a 68.46 per cent decline in value since it grabbed Corus.
Seventeen companies, which received investments through deals involving $12,729.56 million in the past four years, have shown an average negative return of 43 per cent. Twenty-six major outbound M&A deals involving an investment outgo of $26661.47 million have clocked an average negative return of 60.24 per cent. The average MTM negative return for the 11 major domestic deals was 42.65 per cent.
The study showed that earlier deals (2005) showed a relatively better return than the deals done later. The total three-way investments (involved in all deals above $100 million) were worth $45 billion, which has eroded by 53 per cent, according to the survey.
“Fundamentals apart, this has raised questions about timing and aggressive valuations of the deals,” Mr Thunuguntla said.

Source