Demerger Enhancing Shareholder’s Wealth is Myth : Research Study

According to a recent study published in Finance India-Quarterly journal of Finance published by Indian Institute of Finance, titled “Unlocking Shareholder's Wealth through Demerger : Myth or Reality” by Prof. Shivani Abrol, Zakir Hussain College, University of Delhi, the analysis of pre-and post-demerger shareholders’ wealth reveals that demerger enhancing shareholders wealth is a myth. A study of sample firms finds that only some companies have been able to achieve the motive of enhancing shareholder’s wealth after demerger, while others not. Effect of demerger on shareholders’ wealth of demerged firms, carried out with the help of paired sample t-test reveals that there is no change in shareholder’s wealth after demerger.

Restructuring as a corporate strategy has been widely used to meet the objectives of enhanced profit and enjoy benefits of accelerated industrialization and liberalization. The companies have been restructuring their business to materialize the strategy of increasing shareholders’ wealth and increasing market price of the share.

Unlocking or enhancing shareholders’ value is the most commonly found reason for implementing a demerger. Companies that choose to implement a demerger believe for one reasons or another, the value of their business when separated, will exceed the value of the group as a whole. With shareholders’ wealth maximization being recognized as the most important corporate goal, the study has made an in-depth analysis of pre-and post-demerger shareholders’ wealth of eighteen demerged firms whose scheme and share price data have been available for the requisite period covered in the study.

Pre and Post merger strategies can lead to real economic benefits to companies in terms of real economic value by investing capital at rate of return that exceeds the cost of capital. The research study reveals the impact of demerger on shareholders’ wealth of Indian Companies.

Considering t-test when applied on equity share price data of sample companies for requisite period under study, the study concludes that companies have not succeeded in attaining the motive of unlocking shareholder’s value through demerger.

According to study, Inter-industry analysis has found that companies in pharmaceutical industry and media and entertainment industry has experienced enhancement in shareholder’s value in post-demerger period. In textile industry, two out of three have increased shareholders’ wealth post- demerger. While in case of IT software products industry it is reversed; only one company out of four companies have got increased shareholders’ wealth in post-demerger period. Automobile industry has failed to achieve the objective of unlocking shareholders’ value. Automobile industry companies’ shareholders’ wealth falls more than 30% in post-demerger period. In miscellaneous industry group, 40% companies failed while others succeeded to achieve the motive of enhancing shareholders’ wealth.

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This release was published on openPR.