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Updated: December 5, 2010 14:40 IST

Deals can create positive value

D. Murali
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Acquisitions in emerging markets actually create positive value, on average, for both acquirer and acquired companies, writes Rajesh Kothari in ‘Financial Services in India: Concept and application’ (www.sagepublications.com), citing a study by Prashant Kale (2004). This result is different from that in developed market acquisitions, where acquisitions have generally created zero or negative value for the acquiring companies, the author notes.

Among the other findings of the study are that the value creation, in terms of abnormal stock returns following acquisitions, can be significantly greater for acquired companies (8.79 per cent) than for acquiring companies (1.71 per cent); and that multinational acquirers created greater value than local acquirers did, perhaps due to their edge in acquisition experience and skills.

The M&A chapter in the book wraps up with a list of words and phrases in the deal space, such as ‘zombie’ (a bankrupt or insolvent company which continues to operate while it awaits a closure or merger); ‘envy ratio’ (price investor paid/ percentage equity owned by investor); ‘scorched-earth policy’ (a reaction to a takeover attempt that involves liquidating valuable assets and assuming liabilities in an effort to make the proposed takeover unattractive to the acquiring company); and ‘cram-down deal’ (a situation where shareholders are forced to accept undesirable terms in a merger or buyout, like accepting junk bonds instead of cash or equity).

Educative reference.

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