Effects Of Mergers And Acquisition On The Share Price On JSE Listed Firms

Abstract

Given the constant challenges faced by the South African economy and businesses, companies have to find ways in order to experience growth. In the pursuit of growth, companies can do it through organic or inorganic approaches, such as Mergers and Acquisition (M&A). Organic growth and inorganic growth are seen as compliment and not substitutes, therefore when organic growth reaches its ceiling, inorganic growth comes in to sustain the growth speed. Regardless of the economic conditions. M&A by South African firms to continue.

With the continuous growth in the M&A activities in South Africa further studies are needed in order to determine whether there is value being created to the shareholders. Studies conducted in South Africa regarding M&A transaction focused on the announcement of M&A, the analysis of the effect of the method payment in M&A and the announcement of M&A when the merging is either with a private or public company. To the knowledge of the research, no evidence is present with regards to a study conducted on the effect M&A transaction have on value creation based on the type of merger acquiring companies enter into. Additionally based on the type of merger, which of the mergers yield a better return.

This research evaluates the effect of M&A on the share price of Johannesburg Stock Exchange (JSE) listed companies. This study does not only examines the effect of M&A on the share price on JSE listed acquiring companies but also investigate whether there is a difference in the outcomes between horizontal and vertical merger types.

The study was conducted using M&A transactions that were approved during the period of 2009 – 2019, resulting in a sample totalling 45 companies. An event study method was used to calculate the cumulative average abnormal returns (CAAR) over a 21 day event window. The results observed in the study indicate that M&A transactions do not significantly influence stock returns. However, the JSE listed acquiring companies showed positive reactions when it came to Horizontal merger transactions compared to the Vertical mergers. Given that M&A transactions do not significantly influence stock returns, companies should engage in M&A transactions based on the motives of the companies and goals needed to be iii achieved in order to create value. Not to enter in M&A transactions solely for the purpose of wanting to drive the share price