Return to Shareholders from Mergers: The Case of Ril and Rpl Merger

Abstract

Economic theory has provided many motives behind mergers and acquisitions. Such strategies of corporate growth may lead to increasing efficiency by creating economies of scale or by disciplining inefficient managers, mitigating agency problems associated with firm's free cash flow, or to enhance the firm's market power and to utilize tax credits or reacting to deregulation. Academics have discussed for many years a crucial question, whether a merger or an acquisition creates shareholder's value?

A merger may create or destroy shareholder value. It will create value when a merger leads to better positive outcomes than a shareholder can achieve by altering his investment portfolio. However, a merger may destroy shareholder value if the merger outcomes are deficit of what a shareholder could have achieved by altering his investment portfolio.

This study tries to evaluate the financial implications of the RIL RPL merger deal on shareholder's wealth. It was found that in this process of merger; despite the deal appeared to be favourable to the shareholders of RIL they lost and RPL shareholder gained from the deal. Most of the gain accrued to the RPL shareholders and the combined excess return of the merged entity was found to be negative.

This paper is divided into three sections. Section I provides the background of the deal, Section II presents the literature survey, scope of the study, data and methodology and finally the empirical results and conclusions are presented in Section III.

Keywords: Mergers, takeovers, India, RIL, RPL, Event Study