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The Measurement of Post-Acquisition Performance in Rsa Using Economic Value Added (Eva)

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The Measurement of Post-Acquisition Performance in Rsa Using Economic Value Added (Eva) THE MEASUREMENT OF POST-ACQUISITION PERFORMANCE IN RSA USING ECONOMIC VALUE ADDED (EVA) A research paper submitted by Amos Tlali Makhele Student number: 689500 Proposed Supervisor: Dr. Thabang Mokoaleli-Mokoteli Wits Business School May 2013 DECLARATION I, Amos Makhele, hereby declare that the work presented herein is genuine work done originally by me and has not been published or submitted elsewhere for the requirement of a Master in Management of Finance and Investment degree at the Wits business school (WBS). Any literature, data, or works done by others and cited within this report has been given due acknowledgement and listed in the reference section. I further declare that I was given authorization by a panel from the research committee of the WBS to carry out this research. Signed: May 2013 1 ABSTRACT This study re-examines post-acquisition performance of acquiring firms in South Africa using Economic Value Add (EVA). Investigation of the 336 acquisitions occurring during 2000 to 2011 reveals that acquiring firms experience significantly deteriorating EVA after the completion of acquisitions. Further, this study evaluates the performance of other traditional accounting measures including Earning per share (EPS), Return on capital (ROC), Return of Assets (ROA) and Return on Equity (ROE) post acquisition. The results suggest that acquiring firms tend to experience slightly improved performance after completion of the acquisitions when using traditional accounting measures. But the improved operating performance is wiped out by capital costs of the large premiums paid to the target firm, creating no real economic gains to the acquiring firm‘s shareholders 2 ACKNOWLEDGEMENTS I take this opportunity to express my profound gratitude and deep regards to my supervisor Dr. Mokoaleli-Mokoteli for her exemplary guidance, monitoring and constant encouragement throughout the course of this thesis. The blessing, help and guidance given by her time to time shall carry me a long way in the journey of life on which I am about to embark. I also take this opportunity to express a deep sense of gratitude to my company Standard Bank South Africa which helped me in completing this task through various stages. Lastly, I thank almighty, my family and friends for their constant encouragement without which this assignment would not be possible. 3 Table of Contents DECLARATION .................................................................................................................................... 1 ABSTRACT ........................................................................................................................................... 2 ACKNOWLEDGEMENTS ................................................................................................................... 3 CHAPTER ONE: INTRODUCTION ................................................................................................... 6 1.1 Introduction ............................................................................................................................ 6 1.2 Context of the Study ............................................................................................................ 6 1.3 Research Problem ..................................................................................................................... 8 1.4 Research Objectives ................................................................................................................. 9 1.5 Gap in Literature ........................................................................................................................ 9 1.6 Significance of the Study ........................................................................................................ 10 1.7 Structure of the Thesis ............................................................................................................ 11 Chapter Summary .......................................................................................................................... 11 CHAPTER TWO: LITERATURE REVIEW ..................................................................................... 12 2.1 Introduction ............................................................................................................................... 12 2.2 Types of Mergers and Acquisitions ....................................................................................... 12 2.3 Motivation of Mergers and Acquisitions ............................................................................... 12 2.3.1 Synergy ........................................................................................................................ 12 2.3.2 Hubris management ................................................................................................... 13 2.3.3 Greater market power ................................................................................................ 14 2.4 Glamour vs. acquirer ............................................................................................................... 14 2.5 Limitations of traditional financial measures ........................................................................ 15 2.6 Morden financial measures .................................................................................................... 17 2.6.1 EVA and its Advantages............................................................................................ 17 Chapter Summary .......................................................................................................................... 18 CHAPTER THREE: RESEARCH METHODOLOGY .................................................................... 19 3.1 Introduction ............................................................................................................................... 19 3.2 Data and data sources ............................................................................................................ 19 3.3 Research design ...................................................................................................................... 19 3.3.1 Definition of Economic Value Add (EVA) ................................................................ 19 3.3.2 Measuring of net operating profit after tax (NOPAT) ............................................ 20 3.3.3 Measuring cost of equity capital ............................................................................... 21 3.3.4 Measuring equity capital............................................................................................ 22 3.3.5 Measuring EPS, ROA, ROC and ROE ................................................................... 22 4 3.3.5 Statistical measures ................................................................................................... 23 Chapter Summary .......................................................................................................................... 23 CHAPTER FOUR: PRESENTATION OF RESULTS .................................................................... 24 4.1 Introduction ............................................................................................................................... 24 4.2 Sample characteristics ............................................................................................................ 24 4.2.1 Distribution of sample by transactions and payment mode ................................. 24 4.2.2 Distribution of sample by years and payment mode ............................................. 24 4.2.3 Distribution of sample by payment mode and industry ......................................... 25 4.2.4 Distribution of sample by years, industry and number of acquirers.................... 26 4.2.5 Distribution of sample by years and industry ......................................................... 27 4.3 Do Mergers and Acquisitions create value for shareholders? .......................................... 28 4.3.1 Acquirers/target firm’s performance pre-acquisition ............................................. 28 4.3.2 Results for significance change of EVA between pre and post-acquisition ...... 29 4.4 To assess whether there is different performance among economic industries ............ 30 4.4.1 Acquirer/target firm pre-acquisition performance by industries ........................... 30 4.4.2 Results for significance change in EVA from pre-acquisition EVA by industry 31 4.5 Do Size for payment paid to target firms related to the subsequent economic value added during the post-acquisition period? ................................................................................. 32 4.5.1 Pre-acquisition descriptive statistics by size of payment ..................................... 33 4.5.2 Results for significance change in post-acquisition value creation for small and big payments paid ...................................................................................................................... 33 4.6 Empirical results ....................................................................................................................... 34 CHAPTER FIVE: DISCUSSION AND CONCLUSION ................................................................. 38 5.1 Introduction ............................................................................................................................... 38 5.2 Discussion of findings ............................................................................................................
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