Merger Announcement and the Stock Market Reaction

The past decade have seen a string of mergers and acquisitions both within India and outside by Indian as well as foreign companies. It is observed that the day after a merger or acquisition announcement sees flurried activity in the stocl< market with the shares of a firm either rising or dropping with the announcement. This paper examines if the stock market reaction depends on the announcement of the merger, the past history of the firm and the overall market at the time of announcement. It is believed that mergers have a certain moment that drives investors to either purchase or sell stock based on what benefit they perceive the merger to bring. Also, mergers and merger waves can occur when managers prefer that their firms remain independent rather than be acquired. We assume that managers can reduce their chance of being acquired by acquiring another firm and hence increasing the size of their own firm. We show that if managers value private benefits of control sufficiently, they may engage in unprofitable defensive acquisitions. The paper also analyzes the motivation behind a merger and attempts to study if the motivations provide the necessary momentum to match investor sentiment.