Pre and Post M&a Performance in Accounting Ratio Essay

There are loads of tools to measure the motion of a fiscal cognitive operation of an entity but financial proportions is believably the best cognize tool which is mainly to analyze the performance of an entity by comparing the present to the past relative figures taken or composed from the financial statement . The some categories of ratios are liquidity ratios, dineroability ratios, skill ratios, debt ratios and market ratios which go out be able to describe the entitys characteristics. Ratios show the true performance and survey of the entity. In order for investors to determine their choices of entity to invest in, financial ratios play an important role in providing sufficient information to utilisers roughly the entitys characteristic.We look to that companies are performing check after coalition and attainment and there leave alone be an cast up in profit of companies pre unification and acquisition compare to post merger and acquisition activities. However , the global merger and acquisition (M&A) market is expected to experience a modest append this year following authoritative revisions in earnings expectation for 2009. Studies relatively prove that ratios are important but which ratios, among the loads of ratios which fundament be computed easily from the available financial statement, should be used to analyze to obtain a wise decision (Kung & Thomas, 1981) (Maretno & Howard, 1996).Problem statementAccounting ratios usage in merger & acquisition are non understood very well as to whether companies or investors are using accounting ratios to analyze performance pre and post decision making for M&A. Therefore, this memorize ordain try to find out as to whether merger and acquisition activities are caused by the use of accounting ratio when management tries to expand a gilds operation. Accounting ratios is wide in variety and is known for its diversities in calculating unalike ratios, which makes selecting the right ratio to do analysis on is difficult. Every fellowship when making merger and acquisition decisions lead support to go through different decision making process in their composition and not compositiond solely on accounting ratios when taking actions. Things such(prenominal) as kinship of merging companies, financing matter or management efficiency are often overlooked in previous studies, therefore, apart from acknowledgmenting the use of accounting ratio in making merger and acquisition, we will also address on other matters that are affecting merger and acquisition decision making.Companies that have made merger and acquisition in the few years will be analyzed 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 ascertain whether merger and acquisition has improved the companys performance. The entropy that is equanimous could be bare(a ) as the data collected could merely be analyzed from the past. Apart from that, companies that are engaged in merger and acquisition will tend to accommodate their methods in acquiring companies as a secret therefore, there is no information that will be disclosed to us when we are doing enquiry. We will scarcely 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 guinea pig 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 out front merger and acquisition or after merger and acquisition.Studies that have addressed the problemSeveral past studies have shown several findings. There were substantial improvements in the liquidity, leverage and profitability position of most studied companies. Normally, total assets consist of equity, debt and retained earnings to finance the corpor ation. 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 tailfin out of eight revived (Rao & Sanker, 1997). The acquiring firms had performed above the industry average and the playd firms were below the industry average in term of size of it and profitability (Cosh et al., 1998).The firms put down meaningful increase in their net earnings, and those with the successful merger of the firms, the issue on capital employed and interpret on total assets, increased intimately with a signifi go offt percentage. The variability in the earnings (risk) of the pre-merger firms was significantly high than that of post-merger firms (Agundu & Karibo, 1999). Pilloff (1996) finds no significant change in post merger ROE, however, when he utilizes operating(a) 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 order between healthy and troubled companies due to the relative scarcity of outright failures as an indicator of the latter. Data are not readily available to each person and critical data is only available to top level management, which causes analysis on company performance not accurate. Accounting ratios usage in studies are not standardized for exit 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 involved in merger and acquisition. Therefore, it seeks to gift 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 estimate the future of the entitys development and growth 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 acquisition Predictor, modest increases are expected in both deal-making desire 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 materially. 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 as the growth of the entity.Organization of the studyThe rest of the research is organized into chapters as follows. Chapter 2 review about the literature rega rding the accounting ratio performance before and after merger and acquisition would be provided. The root 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 try out design, appropriate methodological analysis 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 done based on former empirical studies and a derivation of hypothesis will be done. To be able to rate 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 performance of firms that has been acquiring other firms.2.1 Theory/Concept FoundationShareholders of a corporation that is involved in Merger & Acquisition body process would like to see their value of downslope in the acquiring corporation to rise post-M&A compared to pre-M&A. Therefore, it is important that an M&A transaction done with the shareholders in mind, this theory of maximizing shareholder value is passably 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 modelers 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 economical climate according to time development. Evaluation of companies performance will be done to ensure shareholders value do increase post-M&A.From the theory we could derive that performance of a compa ny 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, trend 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 pull down price. And it is known that M&A deals are done so that a company could expand into a new market segment or improve their trustworthy 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 bigger if not significantly larger than the acquired firms.2.2 Review of prior(prenominal) Empiric al StudiesLife steering wheel of a firm will accelerate the need for M&A deals as firms grew older, they could be expanding their size and because of this, and M&A will be done to be able to involve themselves into different segments of businesses. According to (Sian Owen & Alfred Yawson, 2008), they propose that in certain life round of golf of a company, they will engage in some kind of M&A activities. This is because there is a need to grow their company or to subside 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 M&A at different life cycle to develop their performance even further or simply to pull out of the company ownership. The data that they use to examine this is based in the US, therefore, it may be not practical to be used here, but this is an opportunity for us to examine the life cycle factor in the pre and post M&A 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 mend (positive, negative and mix) either success or failure will occur for different M&A deals.Since we cannot make any conclusion based on only one ratio. So, different ratio are using in this hold to measure the company performance in term of liquidity position, operating efficiency, overall efficiency, return to equity shareholders and financial composition. By looking at case-by-case ratio, it is hard for researcher to determine whether acquirer company success or failure to make M&A deals? Because a high rate of return showed on acquiree company such as consulting firms doesnt means they make a good investments, since they require no assets. There are more than one-half of the 74 merger and acquisition cases showed an improvement in the financial performance i n post time period of this article.However, 15% out of these cases had increase their running(a) capital 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. Small sample size was used by this researcher. Although there are 200 deals of M&A 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 consideration by making M&A decision such as by predicting future prospects, company past performance, law and regulations of the state of matter which can help to reach 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 release between merger and acquisition. Misleading conclusions may be made by those researchers wh o combine 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 might due to the way the merger or acquire. acquirer may acquire a small division, 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 emf shareholder due to reduce 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 air, unfortunate selection, transmit volatility, and competitiveness of market making (Lipson & Mortal, 2007). According to the prior review, the degree of trading concern in a stock has a positive relationship with the leve l of trading activity. Therefore, the fixed trading costs 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 advised 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 after M&A.Prior studies noted that M&A increases the liquidity of firms on average but the i mprovements 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 acknowledge the effect of firm size and volume to M&A. Therefore, the sizes of the firm are expected to affect the decision M&A 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). Past studies document that larger firms tend to be followed by a greater number of market makers (Wahal, 1997), which he attributes to increased competition among market makers. Also derived in Lipson and Mortal (2007), the inc reased in market making reduces order processing cost, thusly reducing trading cost.According to (Arturo Bris, Neil Brisley, Christos Cabolis 2008), M&A is done following the in incorporatedd governance decision as legal rules or accounting standard. The countries difference in degree of investor protection as well as firm value, ownership structure. When we are merger and acquisition usually adopts the accounting standards. This implies that, the corporate 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 corporate worsening and preserving acquisitions. If we are test pre merger and acquis ition performance not efficiency then corporate governance quality also will not good. The corporation will easy give large corporate takeover or the corporation will shorerupt. However, the corporation operation quality good will not allow 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 successful 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 acquisitio n is not well make the doers 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 M&A synergies can be realized by owing curious 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 R&D. When firms are active in the get out of business, economies of scale in R&D input can be occurred because of M&As. Besides, value can created also by M&As from conjunction complementary know-how (Cassiman B, Colombo M, Garrone P, Veugelers R, 2003). Similarly, intangibles could matter in domestic as well as cross-border takeover (Kang and Johansson, 2000). The ratio of intangible assets (goodwill paid in earlier M&As 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 drop acquirers. The idea is that when firms relying heavily 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 quickly seek to reduce their overall risk and recognize a lower cost of capital by engaging in industry-diversifying and in cross-border M&As. Indeed, cost of capital can be reduced when cash flows from target and bidders are not highly correlated. Besides, additional borrowing capacity post-M&A can be created and this is a good performance for a firm after M&A.If stock prices of a firm are down, the takeover of a firm can constitute a bargain relative to investing in new facilities in order to recover from scratch. Furthermore, th e 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 M&A decisions are negatively related. In contrast, soaring stock prices can facilitate the financing of M&As 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 outdoor(a) 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 M&A announcement date is used to capture stock market conditions, given that private firms dominate the sample.2.3 Hypothesis Develop mentThe first hypothesis comes from our own assumption to examine how does a company perform post-M&A compared to pre-M&A. 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 M&A, 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 M&A activities.H =After M&A, there will be increase in ratios of ROE and ROAH=Before M&A, 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 better after M&AH=Acquirers firm perform worse after M&A2.4 Model/FrameworkNegative relationshipPositive RelationshipAs proposed, the relationship between pre-M&A is a negative relationship to the ratio. And it should be lower than post-M&A ratio as after M&A activities, the ratio should increase and higher.Positive relationshipNegative relationshipAs proposed, the larger firm will adapt less well after M&A compared to smaller firm.Chapter 3 RESEARCH METHODOLOGY3.1 Research DesignThe research will be carried out as an explanatory study. This study method is used for our research because this study will explain how M&A 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 M&A activities. The research will be carried out to test whether an M&A activity does increase the performance of a company or it does not accelerate the activity of the company. Archival research will be used thoroughly to get a line the improvement or deterioration in the firms post-M&A compared to pre-M&A.3.2 Population, Sample and Sampling ProcedureFor our research for M&A companies in Malaysia, a census will be conducted as it is expected that there are only several hundreds of companies that have conducted M&A 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 individual companies with a view that M&A deals are conducted by the company within the years of investigation which range from year 2001 to 2005.ReferencesRao, K.V., & Sanker, K.R. (199 7). 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), Applied 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. daybook 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). 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