Pre and Post M&a Performance in Accounting Ratio Essay Example for Free

Pre and Post Ma Performance in Accounting Ratio Essaythither atomic number 18 loads of tools to measure the military ope ration of a financial public presentation of an entity but financial ratios is probably the best kn profess tool which is mainly to collapse the performance of an entity by comparing the present to the past relative figures taken or composed from the financial statement . The few categories of ratios argon liquidity ratios, profitableness ratios, efficiency ratios, debt ratios and market ratios which volition be able to describe the entitys characteristics. Ratios show the true performance and position of the entity. In order for giftors to determine their choices of entity to invest in, financial ratios play an important role in providing sufficient information to intentrs ab aside the entitys characteristic.We predict that companies argon performing better afterwards nuclear fusion reaction and learning and at that place lead be an increase in profit of companies pre coalition and acquirement comp atomic number 18 to post fusion and science activities. However, the global spinal fusion and acquisition (MA) market is expected to experience a modest increase this class following signifi mucklet revisions in earnings expectation for 2009. Studies relatively develop that ratios argon important but which ratios, among the loads of ratios which end be computed easily from the easy financial statement, should be used to analyze to obtain a impertinent decision (Kung Thomas, 1981) (Maretno Howard, 1996).Problem statementAccounting ratios usage in conjugation acquisition are non understood very well as to whether companies or investors are using accounting ratios to analyze performance pre and post decision fashioning for MA. therefore, this study leave behind try to find out as to whether merger and acquisition activities are caused by the use of accounting ratio when management tries to rotate a high society s operation. Accounting ratios is wide in configuration and is known for its diversities in calculating different ratios, which kick ins selecting the right ratio to do psychoanalysis on is difficult. Every company when making merger and acquisition decisions pull up stakes declare to go by different decision making process in their organization and not based solely on accounting ratios when taking actions. Things such as kinship of group meeting companies, financing matter or management efficiency are often overlooked in previous studies, therefore, aside from addressing the use of accounting ratio in making merger and acquisition, we leave also address on other matters that are affecting merger and acquisition decision making.Companies that befuddle made merger and acquisition in the few years go away be canvas whether merger and acquisition has benefitted the company. This analysis will have to be based on companies that have made merger and acquisition for few years so that analysis could be made to con whether merger and acquisition has improved the companys performance. The data that is collected could be redundant as the data collected could only be analyzed from the past. Apart from that, companies that are assiduous in merger and acquisition will tend to keep their methods in acquiring companies as a secret therefore, there is no information that will be disclosed to us when we are doing search. We will only be able to get information based on announcement on the Bursa Saham Malaysia and also annual report analysis on the companies that we will base our study on. Based solely on the annual report, we will have to analyze companies that have been engaged in merger and acquisition is performing better as a company forrader merger and acquisition or after merger and acquisition.Studies that have addressed the problemSeveral past studies have shown several findings. There were significant improvements in the liquidity, leverage and gainfu lness position of most studied companies. Normally, total assets consist of rightfulness, debt and retained earnings to finance the corporation. In the study, it was found that total assets were always less than the debt plus equity for pre acquisition period, but after acquisition, it is positive. All the units selected for the study were sick, but after takeover five out of eight revived (Rao Sanker, 1997). The acquiring firms had performed above the industry reasonable and the acquired firms were below the industry average in term of size and profitability (Cosh et al., 1998).The firms recorded meaningful increase in their net earnings, and those with the successful merger of the firms, the return on bang-up employed and return on total assets, increased substantially with a significant percentage. The variability in the earnings (risk) of the pre-merger firms was significantly higher than that of post-merger firms (Agundu Karibo, 1999). Pilloff (1996) finds no significant change in post merger ROE, however, when he utilizes operating income before provision instead of net income to calculate ROE, there is a significant increase in post-merger returns.Deficiencies in studiesUnfortunately, most studies do not distinguish amidst healthy and troubled companies due to the relative scarceness of outright failures as an indicator of the latter. Data are not readily available to every person and critical data is only available to jacket crown level management, which causes analysis on company performance not accurate. Accounting ratios usage in studies are not standardized for number of ratios used and types of ratios used, making comparisons of this study to previous studies almost impossible. Some of the studies only find out accounting ratio performance before and after merger and acquisition, but they did not take into account the management performance improvement.Importance of the studyBasically, the compelling reason for merger and acquisition is to make more money. This study analyses the pre and post performance in accounting ratio of various entities in Malaysia which mired in merger and acquisition. Therefore, it seeks to contribute to entities which look forward to expand their businesses by merging and acquiring entities in order to broaden their sources and to increase their performance as well as position of the entity.This study also justifies the importance of financial ratios as a tool in decision making for most users to merge and acquire entities. Besides that, this study further proves that financial ratios could be used to speculate and envision the future of the entitys development and harvest-festival by developing ratio values to be compared with the normal or regular value. Furthermore, the global merger and acquisition market is expected to experience a modest increase this year following significant revisions in earnings expectation for 2009. According to KPMG Internationals Global merger and acquisi tion Predictor, modest increases are expected in both deal-making appetite and capacity globally. Therefore, it is hoped that the result of this study is valuable to entities for the purpose of merging and acquiring.Purpose statementThe purpose of this study is to determine whether financial ratios contribute to the decision in merging and acquiring another entity. For this purpose, we analyze the performance of the entity before and after merging or acquisition of the holding or parent entity across industries to identify the status of the performance and position of the entity currently. We would have to identify the entitys characteristics in terms of their operating and accounting performance by comparing to their values before the merger and acquisition. In our analysis, we also focus on the use financial ratios as a mechanism to compare the pre and post-acquisition performance. Furthermore, we also use financial ratio to predict the performance of the acquired entity as well a s the bring outth of the entity.Organization of the studyThe rest of the research is organized into chapters as follows. Chapter 2 review about the literature regarding the accounting ratio performance before and after merger and acquisition would be provided. The topic and the arguments from researchers will be discussed. Justification of the research objectives would be provided with all the relevant literatures. Chapter 3 describes and provides detailed explanation on the method used in collecting the relevant data, the desired smack design, appropriate methodology employed in this study and also the data analysis method.CHAPTER 2 LITERATURE REVIEW2.0 IntroductionIn this chapter, further discussion on the topic will be do based on earlier empirical studies and a derivation of hypothesis will be done. To be able to evaluate the post and pre merger and acquisition deal by companies in Malaysia, a concept is to be conceived with prior literature that is related to the performanc e of firms that has been acquiring other firms.2.1 Theory/Concept Foundation shareowners of a corporation that is involved in Merger Acquisition action would like to see their value of stock in the acquiring corporation to rise post-MA compared to pre-MA. Therefore, it is important that an MA exertion done with the shareowners in mind, this theory of maximizing shareholder value is fairly new as it is introduced by William Lazonick and Mary OSullivan in year 2000. Shareholder value should be used regularly when decisions are made to be able to regulate how a company operates for the sake of the shareholders. For a shareholder to have his value increased, all the activities from the factory workers to top level management should work together to find the best way to increase the value of the company. To increase shareholder value, restructuring of companies are needed to be able to sustain the changing economic climate according to time development. Evaluation of companies perfo rmance will be done to ensure shareholders value do increase post-MA.From the theory we could derive that performance of a company depends on the value that they would like to preserve for their shareholders. For every shareholder that would like to expand the company operation and size, they will have to be able to provide funds for the company in the form of investment. Apart from that, trim down evolution plays a part in a merging or acquisition decision. An acquirer may look at the performance of the company that they are trying to takeover. The acquirers look at the financial feasibility of acquiring the company on the share price and value for money. If a value is low, they will be able to takeover the company at a lower price. And it is known that MA deals are done so that a company could expand into a new market segment or improve their current segment.Apart from that, it should be noted that there are several types of mergers and acquisition. It should be noted that firms that are acquiring are larger if not significantly larger than the acquired firms.2.2 Review of Prior Empirical StudiesLife cycle of a firm will speed the need for MA deals as firms grew older, they could be expanding their size and because of this, and MA will be done to be able to involve themselves into different segments of businesses. According to (Sian Owen Alfred Yawson, 2008), they visualise that in certain life cycle of a company, they will engage in some kind of MA activities. This is because there is a need to grow their company or to decrease the involvement of the owner by giving up the power of the company to another firm. Therefore, it should be noted that companies will go through and through MA at different life cycle to develop their performance even further or simply to pull out of the company self-command. The data that they use to run into this is based in the US, therefore, it may be not practical to be used here, but this is an opportunity for us to exam ine the life cycle factor in the pre and post MA performance figure.The main objective for merger and acquisition activities is to increase the return of the equity shareholders who are considered real owners of the company. Shareholders are also takes the responsibilities to bear maximum risk of the company. Different impact (positive, negative and mix) either success or failure will pass away for different MA deals.Since we cannot make any conclusion based on only one ratio. So, different ratio are using in this denomination to measure the company performance in term of liquidity position, operating efficiency, overall efficiency, return to equity shareholders and financial composition. By looking at hotshot ratio, it is hard for researcher to determine whether acquirer company success or failure to make MA deals? Because a high rate of return showed on acquiree company such as consulting firms doesnt means they make a entire investments, since they require no assets. There ar e more than half of the 74 merger and acquisition cases showed an improvement in the financial performance in post time period of this article.However, 15% out of these cases had increase their working neat and debt to equity, which means that the company suffer long term financial burden of current assets and long terms funds which use to finance current assets. low sample size was used by this researcher. Although there are 200 deals of MA in India but only 74 companies can provide the available financial data which require by researcher. So, there was reliable issue of this research outcome. Except ratio, there are many issues must be takes into favor by making MA decision such as by predicting future prospects, company past performance, law and regulations of the country which can help to hand a better conclusion. So researcher cant make exact and absolute conclusion by only interpret financial ratio of company (Kumar and Bansal, 2008).Those are significant difference betwee n merger and acquisition. Misleading conclusions may be made by those researchers who combined these two different terms. Acquisitions is a more successful way to bring positive effects to the company compared with mergers in term of generate greater profitability, return on investment or equity, increased in operating performance, etc. This power due to the way the merger or acquire. acquirer may acquire a small division, letters patent or the company which use for the purpose of strategic alliances and value added to current business. In contrary, merges activities become less attractive to the potential shareholder due to visit return or shareholder wealth or even negative return and decrease in profitability or even suffer losses of the company (Hassan, Patro, Tuckman Wang, 2007).The theoretical models of liquidity stresses the degree of trading stock, adverse choice, stock volatility, and competitiveness of market making (Lipson Mortal, 2007). According to the prior revie w, the degree of trading sake in a stock has a positive relationship with the level of trading activity. Therefore, the fixed trading apostrophizes can be spread out over a larger number of trades. The adverse selection cost incurs when negative action is taken to counter an adverse situation of trades. For example, if stock traders have relatively more information compare to the liquidity providers, liquidity providers will recover their losses from trading with better informed counterparts by increasing their average revenue. Stock volatility affects the trading cost positively as well. When stocks are more volatile, the holding cost of the stock would be relatively higher and the cost would be passed on to buyers when being traded. The competitiveness of market making affects the trading cost negatively. When the market makers are less competitive, the increase in competition will reduce the trading cost. Besides that, the firms characteristics also affect the accounting ratio a fter MA.Prior studies noted that MA increases the liquidity of firms on average but the improvements are fully explained by the accompanying changes in firm characteristics (Lipson Mortal, 2007). Firm characteristics such as sizes of the firm, volume and number of shareholders are taken into consideration in prior studies. Relatively larger firms will have greater trading interest since more positions are offered in the firm. Benston and Hangerman (1974) also lie with the effect of firm size and volume to MA. Therefore, the sizes of the firm are expected to affect the decision MA of a firm. The increase in adverse selection can be seen in Heflin and Shaw (2000) where they argue that the effect of a blockholder ownership is a result of superior blockholder information. The results are consistent with the results in Lipson and Mortal (2007). yesteryear studies document that larger firms tend to be followed by a greater number of market makers (Wahal, 1997), which he attributes to i ncreased competition among market makers. Also derived in Lipson and Mortal (2007), the increased in market making reduces order processing cost, hence reducing trading cost.According to (Arturo Bris, Neil Brisley, Christos Cabolis 2008), MA is done following the corporal organisation decision as legal rules or accounting standard. The countries difference in degree of investor shelterion as well as firm value, ownership structure. When we are merger and acquisition usually adopts the accounting standards. This implies that, the merged in a country can adopt difference level of investor protect. If corporate governance have set the legal rules then the corporate follow it.Therefore, the corporate investments losses or change operation performance. The legal rule can protect shareholder and investors so that they will not have legal liabilities. The corporate governance quality is follow shareholder protection and accounting standard when we are merger and acquisition can test co rporate worsening and preserving acquisitions. If we are test pre merger and acquisition performance not efficiency then corporate governance quality also will not good. The corporation will easy give large corporate takeover or the corporation will bankrupt. However, the corporation operation quality good will not let large corporate takeover the firm. The corporate governance quality well can enhance merger and acquisition value and good performance.According to Holger Breinlich (2008), merger and acquisition become industrial restructuring after trade liberalization. It is can increase merger and acquisition activities and merger and acquisition transferred resource from less to more productive firms. It is because pre corporation not efficiency performance source make it loss. Therefore, after merger and acquisition the corporate efficiency performance source make it earning profit and improvement the corporate. Merger and acquisition not just to transfer source, it is also can qualitatively difference from other adjust form. Before merger and acquisition is not well make the workers becoming unemployed and also will make economic recession. When new ownership takeover the corporate then worker has working already and economic also will slowly become good. However, the larger corporate takeovers corporate better the corporate bankrupt and as such no need face unnecessary legal restriction.From the past studies, Letho and Lehtoranta (2004) study that MA synergies can be realized by owing unique technology and knowledge and then transferring these intangibles to the target firm. The industrial organization (IO) literature states that both horizaontal and industry-diversifying acquisitions might affect RD. When firms are active in the line of business, economies of scale in RD input can be occurred because of MAs. Besides, value can created also by MAs from trade union complementary know-how (Cassiman B, Colombo M, Garrone P, Veugelers R, 2003). Similarly, i ntangibles could matter in domestic as well as cross-border takeover (Kang and Johansson, 2000). The ratio of intangible assets (goodwill paid in earlier MAs has to be minus first) to total assets is used to examine these ideas.The financial synergies are realized by looking at the capital structure of potential acquirers. The idea is that when firms relying firmly on bank loans, it is risky to the firm and also acquirers will have less interest on the firm. Therefore, firms that relying heavily on bank loans will promptly seek to reduce their overall risk and recognize a lower cost of capital by engaging in industry-diversifying and in cross-border MAs. Indeed, cost of capital can be reduced when cash flows from target and bidders are not highly correlated. Besides, additional borrowing capacity post-MA can be created and this is a good performance for a firm after MA.If stock prices of a firm are down, the takeover of a firm can constitute a covenant relative to investing in ne w facilities in order to recover from scratch. Furthermore, the valuation of private targets is lower once stock market sentiment is down, through the use of a lower multiples or higher risk premium when valuing target stock. This under-valuation hypothesis suggests that stock prices and MA decisions are negatively related. In contrast, come up stock prices can facilitate the financing of MAs in which they using bidder stock to pay for these deals. When firms consider that their stock to be over-valued, they tend to issue new shares (Shleifer and Vishny, 2003). There will be positive relationship between stock prices and external growth. However, the positive relationship may be difficult to observe when a sample is dominated by private enterprises. This is also because of those non-listed bidder stock is unwilling to be accepted by target investors. The average market-wide price earnings (P/E) ratio at the MA announcement date is used to capture stock market conditions, given that private firms dominate the sample.2.3 Hypothesis DevelopmentThe first hypothesis comes from our own assumption to examine how does a company perform post-MA compared to pre-MA. The assumption is that a company could perform better in the form of ratios because their capital has increased due to increase in non current assets. If a company obtains another company through MA, it is expected that they have certain amount of capital available to expand their firm size therefore, there will be increase in capital in the form of ROE and ROA ratios once a firm is engaged in MA activities.H =After MA, there will be increase in ratios of ROE and ROAH=Before MA, asset ROA and ROE are higherFrom previous study of (Moeller, Schlingemann Stulz, 2004), it is known that they examined for the below hypothesis in their research. And this hypothesis will be tested in Malaysia context so that we will be able to measure the level of performance compared to the size of the firm.H=Small firm perform be tter after MAH=Acquirers firm perform worse after MA2.4 Model/FrameworkNegative relationshipPositive RelationshipAs proposed, the relationship between pre-MA is a negative relationship to the ratio. And it should be lower than post-MA ratio as after MA activities, the ratio should increase and higher.Positive relationshipNegative relationshipAs proposed, the larger firm will adapt less well after MA compared to smaller firm.Chapter 3 RESEARCH METHODOLOGY3.1 Research traffic patternThe research will be carried out as an explanatory study. This study method is used for our research because this study will explain how MA affects performance of a company. The design will be carried out by using pair sample T-Test testing the relationship of the variables of performance of the company and the pre and post MA activities. The research will be carried out to test whether an MA activity does increase the performance of a company or it does not accelerate the activity of the company. Archiva l research will be used thoroughly to understand the improvement or deterioration in the firms post-MA compared to pre-MA.3.2 Population, Sample and Sampling ProcedureFor our research for MA companies in Malaysia, a nose count will be conducted as it is expected that there are only several hundreds of companies that have conducted MA locally. The census data will be collected by using the Bursa Malaysia website via manual search and the usage of Osiris database. Therefore, the data will be collected through these 2 ways.3.3 Data Collection MethodAs it is said, the data to be used will be secondary data. Documentary secondary data will be collected and used throughout this research. The data will be consisted of written materials which are companies annual reports. The annual report will be compiled based on the activities that are involved by the respective companies with a view that MA deals are conducted by the company within the years of investigation which range from year 2001 to 2005.ReferencesRao, K.V., Sanker, K.R. (1997). Takeover as a Strategy of Turnaround. UTIedited book.Cosh, A., Hughes, A., Lee, K., Singh, A. (1998). Takeovers, institutional investment and the persistence of profits, in Begg, I. and Henry, S.G.B. (Eds), apply Economics and Public Policy, Department of Applied Economics, Cambridge University Press, Cambridge.Agundu, P.C., Karibo, N.O. (1999). Risk analysis in corporate mergers decisions in developing economies. Journal of Financial Management and Analysis, 12(2), 13-17.Moeller, S.B., Schlingemann, F.P., Stulz, R.M. (2004). Firm size and the gains from acquisitions. Journal of Financial Economics, 73, 201-28.Pilloff, S.J. (1996). Performance changes and stockholder wealth creation associated with mergers of publicly traded banking institutions. Journal of Money, Credit and Banking, 28, 294-310.Bris, A., Brisley, N., Cabolis, C. (2008). Adopting better corporate governance Evidence from cross-border mergers. Journal of Corpora te Finance, 14, 224-240.Breinlich, H. (2008). Trade liberalization and industrial restructuring through mergers and acquisitions. Journal of International Economics, 76, 254266.Kumar, S., Bansal, L.K.(2008). The impact of mergers and acquisitions on corporate performance in India. Management Decision, 46 (10), 1531-1543.Hassan, M., Patro, D.K., Tuckman, H., Wang, X.L. (2007). Do mergers and acquisitions create shareholder wealth in the pharmaceutical industry? International Journal of Pharmaceutical and Healthcare Marketing, 1 (1), 58-78.