CHAPTER 1: INTRODUCTION
Background of pre and post M&A performance in accounting ratio
There are loads of tools to measure the performance of a financial performance of an entity but financial ratios is probably the best known 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 few categories of ratios are liquidity ratios, profitability ratios, efficiency ratios, debt ratios and market ratios which will be able to describe the entity’s characteristics. Ratios show the true performance and position 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 users about the entity’s characteristic. We predict that companies are performing better after merger and acquisition and there will be an increase in profit of companies pre merger and acquisition compare to post merger and acquisition activities. However, the global merger and acquisition (M&A) market is expected to experience a modest increase this year following significant revisions in earnings expectation for 2009. Studies relatively prove that ratios are important but which ratios, among the loads of ratios which can be computed easily from the available financial statement, should be used to analyze to obtain a wise decision (Kung & Thomas, 1981); (Maretno & Howard, 1996).
Accounting ratios usage in merger & acquisition are not 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 study will 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 company’s operation. Accounting ratios is wide in variety and is known for its diversities in calculating different ratios, which makes selecting the right ratio to do analysis on is difficult. Every company when making merger and acquisition decisions will have to go through different decision making process in their organization and not based solely on accounting ratios when taking actions. Things such as relationship of merging companies, financing matter or management efficiency are often overlooked in previous studies, therefore, apart from addressing 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 company’s 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 engaged 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 research. 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 before merger and acquisition or after merger and acquisition.
Studies that have addressed the problem
Several past studies have shown several findings. There were significant 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 corporation. In the...
References: Rao, K.V., & Sanker, K.R. (1997). Takeover as a Strategy of Turnaround. UTI edited book.
Cosh, A., Hughes, A., Lee, K., & Singh, A. (1998). “Takeovers, institutional investment and the
persistence of profits”, in Begg, I
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 Corporate Finance, 14, 224-240.
Breinlich, H. (2008). Trade liberalization and industrial restructuring through mergers and acquisitions. Journal of International Economics, 76, 254–266.
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.
Please join StudyMode to read the full document