Stock Price Performance After A Merger And Acquisition Of Growthpoint Properties And Rabinov Property Trust

Background of the Merger and Acquisition Arrangement

Question 1

Overview of Acquisition

In this exercise, Growthpoint Properties is the acquirer, while Rabinov Property Trust is the target firm for the purpose of assessing stock price performance after a merger and acquisition arrangement. Rabinov property trust is a small Real Estate Investment Trust which owns and manages a small group of commercial properties which include offices, industrial properties and others. Growthpoint properties Australia is an REIT which invests and owns properties across Australia which includes Official And Industrial Properties of high quality. The ticker of Growthpoint properties which is the acquirer is ASX:GOZ whereas the ticker symbol of Rabinov Property Trust which is the target firm is ASX: RBV. Growthpoint is a South Africa based company which also has its units in Australia and on 13^th of April 2011, the South African parent group of Growthpoint announced that the Australian unit of the company is willing to buy all the units floated by Rabinov Properties. The company has agreed to buy all the units of Rabinov at 0.48 GOZ stapled securities and would be further made an extra payment of 2.3 per cent of Rabinov units as special distribution payment. The offer price stood at $0.95 per share of Rabinov Properties which was already at a premium of 41% compared to the prevailing market price of the units.

Offer Premium Paid

At the time of the purchase announcement, the acquirer’s stock was trading at roughly $1.93, while the target’s stock was trading at around $0.67. The company has agreed to buy all of Rabinov’s shares at a price of 0.48 GOZ stapled securities, plus a special distribution payment of 2.3 percent of Rabinov’s shares. The offer price was $0.95 per share of Rabinov Properties, which was a 41 percent premium over the units’ existing market value. A day before the announcement of the acquisition, the market price of a Rabinov unit was roughly $0.67. The premium paid was calculated dividing the offer price of the acquirer by the current market price of each unit and deducting 1 from it. The premium paid was calculated as 41.79% (Fin24 2011).

The transaction was disclosed on April 13, 2011, and the buyer, Growthpoint Properties, had a return which was positive and slightly over zero with 0.11 percent returns. The stock of Rabinov properties gave a return of roughly -0.20 percent. Although the price of Rabinov’ shares did not vary significantly in the month leading up to the purchase, the loss in the stock price was mostly due to a little shift in the stock price on April 6, 2011, when the stock price fell to $0.67 from $0.70 and remained there until the merger announcement. The price of the acquirer stock was slightly on the rise which was shown by positive stock price movement on an daily average basis with a big jump experienced in stock price on 21^st of March 2011.

This scenario depicts the gains and losses in the acquirer’s and target’s stock prices three days after the merger was announced. According to numerous studies done on the stock price movement experienced by the acquirer and the target’s share price, the acquirer’s price was projected to fall mostly owing to the negative impact of purchasing the target with a 41 percent premium paid (Adnan et.al 2016). Similarly, the target company’s price is projected to climb as a result of the premium price obtained over and above the company’s market value. Even if the target company is acquired through a stock transaction rather than a cash transaction, the price of the target company is expected to rise due to the expectation that purchasing the target company’s shares will allow shareholders to exchange their shares for acquirer shares at a favorable ratio.

Premium Price Paid by the Acquirer and its Impact on Stock Prices

The stock price movement was consistent with the hypothesis outlined above, as the acquirer’s stock fell by 0.34 percent after three trading days following the merger announcement, but the target company’s stock rose by 8.96 percent on a daily average basis, which was considerable when contrasted to the acquirer’s stock’s decrease. Rabinov’s stock price increased by roughly 27% the day after the merger news was made public. The acquirer’s stock price has been steadily declining, with a three-day average daily loss of -0.34 percent.

The stock price movement was consistent with both equities’ three-day performance immediately following the merger announcement, with the acquirer’s stock losing -0.07 percent after a month, while the target’s stock climbed by roughly 1.54 percent on average. This price change was consistent with research and theories that imply that once a merger is announced, the acquirer’s price drops as a negative attitude develops about the large premium price paid by the acquirer to the target. A huge jump in the stock price of Rabinov Properties was experienced on 14^th April 2011 when the stock price rose from $0.67 to $0.87. The stock price remained stable for several days only to fall by a small margin on 4^th of May 2011 where the price moved from $0.87 to $0.86. On 12^th of May 2011 the stock again saw a jump of 3.41% moving the stock price from $0.88 to $0.91. The stock of Growthpoint which was the acquirer company in this transaction witnessed volatility in price with stock price rising and falling at regular intervals.

The long-term holding period return for Growthpoint properties which was ascertained for the period starting from 13^th April 2011 to 13^th April 2014, was around $26.42% whereas the returns for All Ordinary Share Index for the same period was around 8.60%. The holding period return is calculated using the following formula:

P3 = The closing price on the three-year anniversary of announcement of the acquisition.

P1 = The price of the stock on announcement date.

[(P3 – Pt)/Pt] * 100 = [(2.44-1.93)/1.93] * 100 = 26.42%

[(P3 – Pt)/Pt] * 100 = [(5429.31-4999.59)/1.93] * 100 = 8.60%

The stock of the acquirer had provided slightly negative returns of -0.34 percent during the immediate three days after the announcement of the merger and a loss of -0.07 percent after one month when the announcement was made. The acquirer has gained significant value with its stock price going from $1.93 to $2.44 during the three years. This significant value creation can be attributed to several synergistic factors that Growthpoint anticipated and have been able to realize. The pro forma DPS was expected to increase by 0.6% to 17.5 cents per stapled security. There was a major diversification benefit with Growthpoint acquiring Rabinov Properties as it gave the South African based company to continue expand its footprint in Australia and a rich quality of pre-existing tenants that belonged to Rabinov Property. After the acquisition the asset base of the company increased to $1.2 with a market capitalization of $541 million. The syndicate facility which was available to the acquirer was further expanded with introduction of an investor and as a result the margins were improved from 2.20% to 2%. All these factors coupled with an overall economic growth assisted the company in creating value for the shareholders.

Gains and Losses Experienced in the Stocks of Both Companies

Multiple factors like economic activities, financial health of the target, cost savings achieved due the acquisition and several other factors are taken into consideration before arriving at an offer price for the target company. Following are the steps that I would be undertaking to arrive at a fair acquisition price for a target company:

• Firstly, the level of complexity that we will be experiencing in the process of valuation and the structure of the valuation report needs to be assessed as it would have an direct impact on the depth of the valuation report and the costs involved. The report may be divided into three parts namely calculation report, estimation report containing the rationales behind assumptions made and a comprehensive report which contains a comprehensive analysis of the acquisitions cost.
• Secondly, the financial performance reports of the target company needs to be accessed for the past few years. These financial documents may contain valuable information like revenues, sources and stability of the revenue, the recurring and non-recurring costs of the target company, breakdown of revenues, number and quality of employees and various other metrics that assist in understanding the business of the target comprehensively.
• Various questionnaires and one to one sessions with internal employees needs to be arranged to extract internal important information about the company.
• Appropriate valuation methods need to be employed which suits the business scenario and conditions. There is no perfect method that could incorporate the volatilities of a business into the process hence a combination of various valuation methods like earning methods and asset based method needs to be considered to arrive at a fair value of the target’s stock price.
• Finally, after analyzing the fair value arrived using the above mentioned procedure, a fair price can be offered to the target company to accomplish the acquisition. 

Mergers and acquisitions are frequently used by businesses looking for growth and competitive tactics. Mergers and acquisitions also benefit shareholder interests, as well as any enterprises involved in supply chain. In a merger acquisition transaction, the most important element behind a successful completion of the deal is the determination of appropriate acquisition cost. The acquisition is said to have occurred at a premium cost if the price agreed upon by both parties for the acquirer to pay the target is more than the current market price of the target’s shares. Similarly, the acquirer is said to have purchased the target at a discount if the price provided by the acquirer is less than the market price of the target’s shares. Various researches on the viability and long-term success of acquisitions have been conducted and most of them suggest that acquirers do not generally benefit from acquisition (Zhang 2019). This failure to benefit from the acquisition can be attributable to higher premium paid to the target company by the acquirer company at the time of acquisition (Zhao and Pascual 2018). The premium paid by the acquirer is based on several rationales and the primary rationale being the synergistic potential of the acquisition if it goes through. According to (Fieberg, Lopatta and Tammen 2021), acquisitions in most of the cases have destroyed value for the acquirers.

The premium paid by the acquirer to the target company is shown in the books of the financial statements with the term goodwill (Sarra, Baghar and El Kabbouri 2018). There are several reasons behind an acquirer offering and paying a premium price to the target company, some of them discussed in detail below:

• Control premium or value of control – The benefit of an acquirer when it enjoys full control after an acquisition justifies a premium over the purchase price paid to the target. Having control over the business of the target has certain advantage for the acquirer like enjoying complete authority over deciding and releasing dividend payments to shareholders, have control over strategies and business plans including deciding projects to be undertaken in the future, selection of personnel to be included in the board of directors and the choice of selecting the CEO.
• Synergistic value – This is one of the major rationales behind a company acquiring another company. Shareholder’s wealth is enhanced when two firms enter a merger agreement increasing the value of the resulting combined entity. The increase in value may be a result of synergies realized which is the primary reason anticipated by the acquiring firm.
• Access to assets – The target firm might possess some assets which the acquiring company wishes to own which becomes the driving factor behind the decision to acquire. Sometimes target company possess some assets which takes time to develop hence, acquiring company tries to get its hands on the asset by offering to acquiring the (Shah 2019).
• Diversification benefits – Mergers are regularly performed for the purpose of diversification. A corporation could utilize a merger to diversity its operations by entering a new market or providing new products or services, for example. Additionally, it is customary for a manager of a company to organize a merger arrangement in order to diversify risks associated with the operational business.
• Cost and revenue synergies – Synergies that largely enhance the company’s potential to generate revenue. Market growth, manufacturing diversification, and R&D activities are just a few examples of revenue synergies that may be achieved. Synergies that lower the cost structure of the firm. In general, a good merger may lead to cost savings, access to new technology, and even the removal of some costs. All of these occurrences have the potential to enhance a company’s pricing structure (Schosser and Wittmer 2015). For all the above reasons acquirer company is ready to pay premium over the value of the target company.
• Tax benefits – Tax savings often drive the decision of acquisition merging a company with high tax carry forward losses with a company with adequate current earnings might be advantageous. The newly amalgamated firm’s tax liability will be reduced by this tax carry forward loss. Another way to save money on taxes is to reduce indirect taxes. Mergers and acquisitions may be utilized to create value and boost shareholder wealth. This is feasible because to revenue synergies, cost synergies, and so on (Vazirani 2015).

The acquirer’s stock price has seen negative returns on average, owing to the significant premium paid by the acquirer to the target. The substantial premium paid by the acquirer to the target firm has a long-term influence on the acquirer’s profitability. The acquirer frequently takes on debt or borrows money from outside sources at high interest rates, which has a negative influence on the acquirer’s future profitability. Debt or loans may compel a corporation to make frequent interest payments, reducing revenues. Acquisitions are sometimes seen adversely by the market since they assist conceal the acquirer’s poor financial condition, which it tries to cover by getting involved into multiple acquisition and merger deals. Market participants may also believe that the premium paid by the acquirer does not justify the target company’s earnings per share and is overestimating the values of the synergies identified to some extent which then compels them to sell the shares of the company in the market driving the price of the stock down. Often the reasons behind overestimating the value of the synergies derived is mainly due to lack of information and access to managers, channel of debtors and creditors, supply chain management and the quality of management process within the company. The below graph represent the % of firms able to achieve the expected synergies:

It can be analyzed using the graph above that only 17 out of 77 firms are able to fully realize the expected revenue synergies while 23 of the firms could only realize less than 30% of the synergies mainly due to the underestimation of the percentage of customers lost (McKinsey 2021). This observation is consistent with various studies regarding the failure of corporates to identify the practicality of the potential mergers which are expected. Hence, it is observed that majority of the acquirers faces the wrath of acquisition experiencing erosion of value (Ghosh and Dutta 2016). 

References

Adnan, A.T.M., Hossain, A., Adnan, A. and Hossain, A., 2016. Impact of M&A announcement on acquiring and target firm’s stock price: An event analysis approach. International Journal of Finance and Accounting, 5(5), pp.228-232.

Fieberg, C., Lopatta, K., Tammen, T. and Tideman, S.A., 2021. Political affinity and investors’ response to the acquisition premium in cross?border M&A transactions—A moderation analysis. Strategic Management Journal, 42(13), pp.2477-2492.

Fin24. 2011. Growthpoint in major Aussie venture | Fin24. [online] Available at: <https://www.news24.com/Fin24/growthpoint-in-major-aussie-venture-20110418> [Accessed 27 January 2022].

Ghosh, S. and Dutta, S., 2016. Mergers and acquisitions: A comparative review of literature. Industrija, 44(1), pp.187-208.

McKinsey. 2021. Where mergers go wrong. [online] Available at: <https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/where-mergers-go-wrong> [Accessed 26 January 2022].

Schosser, M. and Wittmer, A., 2015. Cost and revenue synergies in airline mergers–Examining geographical differences. Journal of Air Transport Management, 47, pp.142-153.

Shah, H., 2019. Merger and Acquisition: Opportunity and Challenges for MFIs in India.

Vazirani, N., 2015. A Literature Review on Mergers and Acquisitions Waves and Theories. SIES Journal of Management, 11(1).

Zhang, C., 2019. The Review of Factors Affecting Merger Premium. Journal of Service Science and Management, 12(02), p.200.

Zhao, Y. and Pascual, J.L., 2018. Correlation Studies on Corporate Governance, Financial Structure, and Merger and Acquisition Premium in Ecological Enterprises. Ekoloji, 27(106), pp.17-23.

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