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« Mergers and Acquisitions »
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How corporate mergers and acquisitions impact small investors
July, 17th 2017

The mergers and acquisitions (M&A) activity has picked up recently with deals such as IDFC Bank and Shriram Capital, ABC Bearings and Timken India, HPCL and ONGC, in the offing.

The government is also planning for more SBI-like mergers. Investors cannot afford to ignore M&A activity. So, here’s a primer.

Why companies go for M&A
“The objective is usually one or more of the following: To consolidate market share, forward or backward integration, acquiring geographical presence, intangible assets or a customer-base,” says Prashant Mehra, Partner, Grant Thornton India.

Generally, the entities getting merged reinforce each other’s strengths. “The logic of synergy is two plus two is more than four,” says V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services. To illustrate, consider the IDFC Bank-Shriram Capital merger proposal.

IDFC Bank has a good presence in Karnataka, Maharashtra, and Madhya Pradesh with 75 branches, while Shriram Transport Finance (STF), a commercial vehicle financing player, has a national presence with around 1,000 branches. “The merger will allow IDFC to leverage the huge branch network of STF. The cost of funds for the merged entity will also be lower, thanks to lower cost of CASA (current and savings account) deposits of IDFC,” says Vijayakumar.

What happens to your stock holdings
This depends on the swap or the share exchange ratio of an M&A. Swap ratio is the ratio in which the acquiring company offers its own shares in exchange for the target company’s shares. For instance, the recent merger of Kotak Mahindra Bank and ING Vysya Bank had a swap ratio of 725:1000. ING Vysya shareholders received 725 shares of Kotak for every 1,000 shares of ING Vysya.

Your stock holdings generally benefit if the merger or acquisition turns out to be successful. Kotak-ING Vysya merger and HDFC Bank’s acquisition of Centurion Bank of Punjab have created wealth for investors of both the acquiring and the target companies. However, in some cases, such as Ranbaxy-Sun Pharma merger, investors may lose out.

Impact on stock prices
Mergers and acquisitions usually lead to an increase in the share price of the merged entity in the long run. “This is because the merged entity will benefit from the synergy,” says Arpit Jain, Assistant Vice President, Arihant Capital Markets. The stock prices could fall too, due to inappropriate valuations, say experts. “If the target company’s valuations are high, then the shareholders of the acquiring company may be at the losing end due to the dilution of their holdings.

If the valuations are low, then the merger may erode the target company’s shareholders’ value,” says Jimeet Modi, CEO, Samco Securities. Keep in mind the valuations of the two companies before making an investment decision. Sometimes, companies announce open offers where you get an opportunity to exit your investment at a premium price usually. “This is a good opportunity, especially for a company whose stocks may not be trading actively,” says Dipankar Bandyopadhyay, Partner, Verus Advocates.

What to look in for a new entity
The track record of the management, the potential of the sector, existing competition, entry barriers for new players, innovative business model, scalability and the acquiring company’s financial track record are among the things that investors should closely monitor. You should closely watch the company for signs of loss in shareholders’ value—likely if the intended objectives of the merger are not being met.

You should also assess the increase in the market share of the merged entity. Generally, too ambitious deals, especially those financed through debt, can be quite disastrous, say experts. Suzlon’s acquisition of German company REpower is a case in point.

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