Dissertation

Announcement Effect of Cross-Border M&As on Indian Acquiring Firms
Announcement Effect of Cross-Border
M&As on Indian Acquiring Firms
By
Pranav Nagar
2007-08
A Dissertation submitted in part consideration for the
degree of MA in Finance and Investment
1
Acknowledgement
I would like to express my sincere gratitude and thanks to my supervisor, Professor
Scott Goddard who has provided guidance, value advice and encouragement during
this research study.
I would like to mention a special thanks to Mr. Jaideep Gupta – Vice President,
Earnest & Young Pvt. Ltd, (Mumbai. India) for helping me source the data which I
have worked on in this dissertation
I would also like to thank my family for their great and never-ending support which
has kept me going in this whole year. Finally, I would like to thank all of my friends
who helped me in every way possible and stood by me in troubled times.
i
Abstract
Whenever there is an announcement about a merger, especially a cross-border merger,
there is an excitement and expectation among the shareholders of the acquiring
company. This expectation may or may not convert into an abnormal return. My
dissertation identifies this abnormal return and attempts to verify the significance of
the same in the short-term. Whether the abnormal returns are significant to the
announcement of the merger, determines the success of the merger in the short-term.
Though there are many variables involved in determining the overall success of any
merger, the immediate market reaction is sufficient to establish a criterion for success.
I have chosen cross-border mergers between the Indian acquiring companies and
European target companies as the basis of my study. The Indian M&As market is
growing at a remarkable speed and has good future prospects. The lack of research on
cross-border M&As in India makes my study an interesting addition to the existing
literature.
An interesting fact that emerged from this study is the significant abnormal gain
before the announcement of merger. This indicates the probability of insider trading
in the Indian stock markets. This study shows that the announcement effect has a very
short-lasting effect and the abnormal gains are only seen on the day of the
announcement. This study also reveals that shareholders do gain abnormal returns
around the date of the announcement. However, this gain is due to the price pressure
effect and not the announcement effect.
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Table of Contents
Acknowledgement …………………………………………... i
Abstract …………………………………………………….... ii
Table of Contents ………………………………………. …... iii
List of Tables and Figures ………………………………….. v
1 Introduction …………………………………………………. 1
1.1 Background ……………………………………………………… 1
1.2 Objective of My Study ………………………………………….. 2
1.3 Structure of the Dissertation …………………………………….. 3
2 Mergers & Acquisitions in India …………………………… 6
2.1 Growth in Indian M&A …………………………………………. 6
2.2 Liberalisation as a Boost ………………………………………… 9
3 Literature Review …………………………………………... 11
3.1 What are Mergers and Acquisitions? ……………………………. 11
3.2 Types of Mergers ………………………………………………… 13
3.3 Cross-Border M&As …………………………………………….. 15
3.3.1 Historical Rise in Cross-Border M&As …………………. 16
3.3.2 Recent Downturn ………………………………………... 17
3.3.3 Characteristics of Cross-Border M&As …………………. 18
3.4 Motives for Cross-Border M&As ……………………………….. 20
3.5 Performance of Cross-Border M&As …………………………… 23
iii
4 Measures of Performance of Cross-Border M&As ………. 30
4.1 Evaluating Performance by Accounting Studies ………………... 30
4.2 Evaluating Performance by Event Studies ………………………. 31
4.3 Evaluating Performance by Survey of Executives ……………… 34
4.4 Evaluating Performance by Clinical Study ……………………... 35
5 Empirical Study: Data and Methodology …………………. 37
5.1 Data ……………………………………………………………… 37
5.2 Methodology …………………………………………………….. 41
5.2.1 Calculation of Abnormal Returns ……………………….. 42
5.2.2 Statistical Tests for Abnormal Returns ………………….. 44
5.2.3 Calculations of Cumulative Abnormal Returns …………. 45
5.2.4 Price Pressure Hypothesis ……………………………….. 46
6 Results and Analysis ……………………………………….. 49
6.1 Abnormal Return Analysis …………………………………….... 49
6.2 Cumulative Abnormal Return Analysis ………………………… 53
6.3 Abnormal Trading Volume Analysis …………………………… 54
7 Conclusion and Limitations ………………………………... 58
7.1 Conclusion ………………………………………………………. 58
7.2 Limitations of the Study ………………………………………… 60
References ………………………………………………….... 61
Appendices …………………………………………………... 75
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List of Tables and Figures
Table 2.1 Cross-Border Mergers and Acquisitions: India …………………. 7
Table 2.2 Top 10 Foreign Acquisitions by Indian Firms …………………... 8
Table 3.1 Cross-border M&A investments
(% of FDI inflows to the host countries) ………………………… 16
Table 3.2 FDI Inflows in India from 2000 – 2007 …………………………. 17
Table 3.3 Global Strategy: An Organizing Framework ……………………. 22
Table 6.1 Average Abnormal Return of Acquiring Firm’s Stock and
Test Results ……………………………………………………… 50
Table 6.2 Cumulative Abnormal Returns and Test Results ……………….. 54
Table 6.3 Abnormal Trading Volume and Test Results …………………… 56
Figure 2.1 Geographical Distribution of Indian Cross-Border M&As from
1995-2006 ……………………………………………………….. 9
Figure 3.1 Global Cross-Border M&As, Value and Growth Rate,
1988-2006 ……………………………………………………….. 18
Figure 5.1 Country-wise Disrtibution of Deals & Deal Value
(USD millions) …………………………………………............... 39
Figure 6.1 Average Abnormal Returns during the Event Window …………. 49
Figure 6.2 Cumulative Abnormal Returns for the Event Window ………….. 53
Figure 6.3 Abnormal Trading Volume for the Event Window ……………... 55
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Chapter 1 – Introduction
1.1 Background
Along with the trends like privatisation and deregulation of financial markets, the
process of consolidation of companies has greatly accelerated. Much of the huge
amount of M& A activity is part of the modern day business strategy to consolidate.
As markets become more and more crowded and competition intensifies, companies
naturally look at the best way by which they can strengthen their position. M&A
activity is a popular policy that provides this solution. Mergers and Acquisitions
(M&A) originated in the United States. The US has had five major merger waves,
which started in the 1890s till the recent years. Each merger wave had different
characteristics, with one thing in common – the general trend of increasing volumes.
Over the years M&As were introduced in Europe and today M&As pervade
throughout the world.
A significant characteristic of the present merger wave is the large incidence of cross
border takeovers and mergers. This type of merger activity has become progressively
important with the increasing integration of the world financial markets over the last
two decades. Though cross-border M&As were initially based only amongst the
industrial countries, they have now spread within the developing nations. The
considerable flow of Foreign Direct Investment (FDI) from industrial nations to the
developing countries has resulted in acquisition of existing enterprises rather than
green field investments. Though literature mentions the presence of cross-border
1
M&As in the developing countries, it fails to mention its reach. The major
composition of M&A activity is based in the relatively advanced Newly
Industrializing Countries (NICs) like India, China, Brazil, etc.
India has seen tremendous growth in the field of M&A, domestic & cross-border.
When India first announced the New Economic Policy in 1991, analysts believed that
the Indian corporate sector would be ruled by Foreign Multinationals. However,
Indian businessmen have now joined the merger race as Indian companies are
growing at an exceptional rate. Indian companies have proved that they are also a
strong potential buyer of businesses. The outward FDI flows have increased sharply
from US $ 5 million in 1987 to US $ 2024 million in the year 2004 (Prasad, 2007).
Today Indian companies are in the forefront of global acquisitions. Indian companies
have made strategic acquisitions in a variety of fields. From Tetley Tea (Tea Industry)
to Betapharm (Pharmaceutical) to Corus (Steel) and Jaguar & Land Rover
(Automobile), India is spreading its wings. Despite the surge in the M&A volumes in
India, there has been very limited research to assess the success or failure of the
merger. Most research available is theoretical and qualitative based. There is scarce
research on the quantitative evaluation of the returns that the shareholders of the
acquiring Indian companies or target Indian companies earn.
1.2 Objective of My Study
My dissertation aims to gauge the effect of a merger or acquisition by Indian
companies on the returns generated to their shareholders. This is done by calculating
the abnormal returns that shareholders earn around the time of the merger. The lack of
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research about cross-border M&As in India makes my work not only challenging but
also gives me an opportunity to add valuable insight in this area. Not to mention, a
very important objective of the dissertation is to enable me to learn the intricacies of
M&A evaluation. This study provides an ideal theoretical background, giving
highlights of previous researches. It also highlights the M&A scenario in India by
evaluating the short term abnormal returns and its significance to the event of merger.
I have used Event Study to evaluate the effect of the announcement of the merger on
the share price of that company. All calculations are proved statistically to provide
robustness to my findings.
1.3 Structure of the Dissertation
My dissertation is divided into seven well defined chapters. The first chapter is an
introductory chapter that provides the perfect background for the start of the
dissertation. It highlights the objective of my study & details the dissertation structure.
The second Chapter is an overview of the cross-border M&A situation in India. It
briefs about the background and the growth of cross-border M&As in India. This
chapter describes the historical presence of India in the said field and also its current
position. The scenario is explained by well placed tables and graphs. They depict the
geographical distribution of India’s acquisition, cross-border deal volumes in India in
the last decade and the top 10 overseas acquisitions made by Indian companies.
Chapter 3 gives an insight of the previous documented literature on cross-border
M&As. Though, generally, a literature review is a study of the previous researches
3
conducted on the topic, I have included a small part explaining the basics of M&A,
the different types of M&As and the main motives behind them. As stated above, due
to lack of research on Indian cross-border M&As, I have provided the literature
review which discusses the evaluation of cross-border M&As in the western
countries. This is then amalgamated with the scant literature available on Indian
M&As. Thus this chapter provides a comprehensive study of the past cross-border
merger evaluations.
There are various ways in which a merger deal can be evaluated. The method used by
me, Event Study, is one of the methods. Chapter 4 describes the different methods
used in assessing the success of the merger like Accounting Study, Event Study,
Survey of Executives and Clinical Study. This chapter lists the pros and cons of each
method to give us an insight in the study we use.
Chapter 5 elucidates the empirical study that I have conducted to evaluate the short-
term abnormal gain of the companies involved in merger. First part of this chapter
elaborates on the data collected for the empirical study, processing of this data and
difficulties faced in its collection and processing. Some interesting analyses which are
derived from the data are also shown in this part. The second part convolutes the
methodology that is adopted to calculate various variables like abnormal returns,
cumulative abnormal returns and abnormal trading volume. Each calculation is
followed by its relevant statistical test which includes one-sample t-test and Wilcoxon
Signed-Rank Test.
4
The calculations and statistical tests conducted in the previous chapter are explained,
analysed and critically evaluated in Chapter 6. This chapter also encompasses the
comparison of my results with some of the existing empirical evidences. Chapter 7 is
an extension from here, as it gives the concluding remarks of the entire study along
with the primary limitations of this study.
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Chapter 2 – Merger &Acquisitions in India
2.1 Growth in Indian M&A
In the past, most media references to India’s growth have focused on the country as a
destination for outsourcing and investment. However, in recent years, the world has
seen the arrival of India as a shaping force on global markets. This can be said,
considering the tremendous leap Indian companies have taken in overseas acquisitions
of prominent businesses. In today’s global economy, mergers and acquisitions are
being increasingly used as a strategy for achieving a larger size and asset base, faster
growth in market share and for becoming more competitive through economies of
scale.
In 2006 a report published by Accenture studied the cross-border expansion of Indian
companies and the opportunities & challenges ahead. The report suggested that main
factor driving Indian cross-border mergers and acquisitions (M&As) is the search for
top-line revenue growth through new capabilities and assets, product diversification
and market entry. Indian companies are mostly motivated to look abroad in response
to new competition, complex or risky domestic markets or to find technology and
assets that are lacking in India. Buoyant Indian Economy, extra cash with the Indian
corporates, easy access to debt financing – both at home and from international banks,
government policies and newly found dynamism in Indian businessmen have all
contributed to this new acquisition trend (Sharma & Sharma, 2008).
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With the liberalisation of the Indian economy in 1991, it was feared that the country
would be run by multinationals. But Indian companies have not only conquered the
home ground but have now ventured into the global commercial war. As Quoted by
Daniel Vasella, CEO, Novartis, “It is clear that you cannot stay in the top league if
you only grow internally. You cannot catch up just by internal growth. If you want to
stay in the top league, you must combine.” (2002). It can be said that the major cross-
border acquisition spree for India started around 1999 & 2000. Table 2.1 shows the
cross-border M&As taking place in India from 2000 onwards. It can be seen that there
has been a continuous growth in the value of cross border deals.
Table 2.1: Cross-Border Mergers and Acquisitions: India
Sales Purchases Total Cross-Border

Year
(US $ million) (US $ million) Deal Value
2000 1219 910 2129
2001 1037 2195 3232
2002 1698 270 1968
2003 949 1362 2311
2004 1760 863 2623
2005 4210 2649 6859
Total 10873 8249 19122
Source: UNCTAD WIR, 2006
Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to
US$ 4.3 billion in 2005, and further crossed US$ 15 billion mark in 2006. Only in the
first 10 months of 2006, the cross-border M&A value reached a total of US$ 23
billion. Also another clear indication of growth in cross-border mergers was the
number of deals struck, which increased from 40 deals in 2002 to more than 180 deals
in 2006 (Accenture Report, 2006). Undoubtedly, 2006 was a benchmark year for
Indian acquirers and Indian cross-border M&A deals. Not to mention the fact that
almost 99% of all overseas acquisitions were made with cash payments (Sharma &
7
Sharma, 2008). The year 2007 saw the value of deals further increase to US$ 28.3
billion, which outstripped the value of domestic deals by more than 50% (Spink,
2008). This can be attributed to the fact that there have been many high profiles
acquisitions by Indian companies in the global market. Table 2.2 shows the top ten
Acquisitions made by an Indian company in recent years.
Table 2.2: Top 10 Foreign Acquisitions by Indian Firms
Rank Value Year Indian Target Firm Country Industry Owner

US $ Firm ship %
Millions
1 12100.0 2007 Tata Steel Corus Steel UK Steel 100
2 6000.0 2007 Hindalco Novelis USA Aluminium 100
3 1400.0 2006 ONGC Petrobras Brazil Petroleum N/A

Videsh
4 766.1 2002 ONGC Greater Nile Sudan Petroleum 25
Videsh Oil Project
5 677.0 2006 Tata & Tata Glaceau USA Health 30
Sons Drinks
6 600.0 2004 ONGC Greater Angola Petroleum 50
Videsh Plutonio
Project
7 600.0 2005 Opto Eurocor Germany Medical N/A
Circuits GmbH Equipments
India Ltd
8 570.3 2006 Dr. Reddy’s Betapharm Germany Pharma & 100
AmG Healthcare
9 565.0 2006 Suzlon Hensen Belgium Energy 100
Energy Transmission
10 522.0 2006 Kraft Foods United UK Food & N/A
Ltd Biscuits Beverages
Source: Compiled from FICCI (2006) and CMIE (2007)
The cross-border M&A deals in India in the past & recent years have brought forward
another interesting statistic. If the overall number of deals are analysed, it is seen that
Indian companies are concentrating more on acquiring companies in North America,
Europe and developed Asia. Figure 2.1 shows the distribution of Indian cross-border
8
deals based on geographical region. It is seen that of the total cross-border deals in
India during the period of 1995 to 2006, 83% of the deals were attributed to the three
regions mentioned above.
Figure 2.1: Geographical Distribution of Indian Cross-Border M&As from 1995-2006
Source: Analysis of Thomson Financial Data
This is mainly due to the fact that the very motive of Indian companies acquiring
globally is to expand their market bases, expand the asset base and more importantly,
bring in the technological advancement that India is in deficiency of.
2.2 Liberalisation as a Boost
A very important factor that promoted the growth of M&A activity in India is the
changes that have taken place in the area of regulations. It started with the New
Industrial Policy in 1991 which showed a liberal attitude towards FDI. The
9
abolishment of the Foreign Exchange Regulations Act (FERA) restriction on foreign
ownership in Indian companies and the removal of the requirement of prior
government approval for M&A was a shot in the arm (Kumar, 1998). In 1994, the
Securities and Exchange Board of India (SEBI) issued Guidelines for Substantial
Acquisition of Shares and Takeovers, referred to as the Indian Takeover Code 1994
(Kumar, 2000). However, there were amendments to it and was finally adopted by
SEBI in 1997. (For details of the Indian Takeover Code, refer Appendix 1). There are
various laws in India that govern the M&A activities. First, The Companies Act, 1956
lays down the legal procedure for M&As. These include permission for merger
through the memorandum of association, approval of board of directors, Application
and sanction by the High Court, Transfer of Assets & Liabilities and finally payment
by cash or securities (Business.gov.in, 2008). Earlier all M&As were monitored by
the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. However, a more
concentrated, The Competition Act, 2002 was put into action. This definitely helped
to smooth the process of M&As and at the same time had a complete check on the
effect on competition affected.
There are various issues faced by acquiring companies in a cross-border M&A, like
Government Policy, Competition Commission restriction etc. However, in case of
India or for that matter, any developing country company, one issue faced is
reluctance of a developed nation company to the acquisition. This can be seen is many
cases like very recent Tata-Jaguar Merger, when the latter showed reluctance after
one of their units showed profits & promising prospects. Though, with the
globalisation and the evident improvement in the performance and standards of Indian
companies, this issue is fast fading away.
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Chapter 3 – Literature Review
3.1 What are Mergers and Acquisitions?
Say Company A has a Value of ‘VA’ and Company B has a value of ‘VB’. When
added, the total value is VA + VB. A merger of company A and company B
theoretically, is supposed to have a total value greater than VA + VB. In other words,
the main motive behind a merger or an acquisition is to create a company which has a
shareholder value more than the total of the two companies being merged.
Mergers and acquisition (M&As) are one of the most important strategies of corporate
expansion and growth, also being known as an external capital investment. In general,
the primary purpose of the activity of merger and acquisition is to increase the long
term profitability of corporations (Manne, 1965). There have been empirical
evidences, like Andrade et al., (2001), to show that mergers are carried out mainly for
shareholder value maximization. However, researchers like Penrose (1959),
Berkovitch and Narayanan (1993), Weston (2001) and Gaughan (2005) have argued
that mergers may be undertaken by other motives – personal interests of managers,
unhealthy competition and greed, which in turn devour shareholder value.
The terms Mergers and Acquisitions need to be understood very clearly to understand
their significance. In every day life, these words are often used interchangeably.
However, it is important to understand the difference between these words.
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According to Khan (2004) and Sherman and Hart (2006), a merger is a combination
of two or three firms in which the assets and liabilities of the selling firms are
absorbed by the buying firm, The other firm ceases to exist henceforth. There is also a
possibility that two companies merge to form an entirely new entity. This means that
stocks of both the merging companies are surrendered for issuing a new stock of the
newly merged company
An Acquisition, as the name suggests, is buying or acquiring an asset. This asset can
be a plant, machinery or an entire company itself. As explained by Sudarsanam
(1995), an acquisition is an ‘arms-length’ deal, where one company purchases the
shares of another company and the acquired company though remains in existence, its
ownership changes. Acquisition of a controlling stake (76 %) of ITNation by UTV
India Ltd. is an example of such an acquisition. Another example is the 28% equity
stake of International Data Management Ltd. acquired by HCL Technologies Ltd.
Such an acquisition gives an organization the status of a Holding Company. A holding
company is a company which holds more than half of the nominal value of the equity
capital of another company – known as subsidiary company, or controls the
composition of its Board of Directors. In case of an Acquisition, both the holding
company and the subsidiary company retain their legal entity and also maintain
separate books of accounts. According to the Indian accounting standards, it is not
mandatory to consolidate the accounts of the two companies. However, as a practice
of good corporate governance, companies generally give the consolidated results.
There has been some ambiguity about the term ‘Takeover’. According to Gaughan
(2002), takeover refers to a hostile event, i.e. a company taking over another against
12
the will of the owners or managers. However, Sudarsanam (1995) believes that
takeover is similar to an acquisition where the buying company is much larger than
the acquired company. A holding company is a company which holds more than half
of the nominal value of the equity capital of another company which is called a
subsidiary company or controls the composition of its Board of Directors. The
acquisition of a 5% stake of East India Hotels Ltd. by ITC Ltd., gradually over a
period of one year, is an example of an attempted hostile takeover (BusinessWeek,
2000). Though ITC referred to this as a part of normal ‘treasury operations’, East
India Hotels’ founders, Oberoi Family, increased their stake from 36% to 39% to
strengthen their hold on the company. However, a takeover is not as easy as it seems.
According to the Monopolies and Restrictive Trade Practices Act, 1969 a takeover is
defined as the acquisition of atleast 25% voting power in the company. Also,
according to Section 372 of the Companies Act, 1956 any company investing in
subscribed capital of another company by more than 10%, has to gain an approval at
the shareholder General Meeting and of the Central Government.
3.2 Types of Mergers
Vertical Merger – A vertical merger is a merger in which the company expands
forward in the direction of the customer and backwards towards the source of raw
material. Imagine a cricket bat company merging with a wood production company.
This would be an example of merging with the raw material supplier. The acquisition
of Flag Telecom by Indian Giant Reliance Communications Ltd. is an example of
such vertical merger. Flag Telecom was the provider of optical fibre lines to Reliance
13
across the continent. Its acquisition marked the presence of Reliance Communications
on the global map.
Though the main aim of this type of merger is reducing dependency on suppliers or
reducing cost of production, a vertical merger is often viewed as anti-competitive
(Learnmergers.com, 2008). This is because, the supplier acquired by the company
may be supplying to a competitor as well. It might put this competitor in a temporary
problem or force him out of business. Precisely for this reason, regulatory bodies may
deny a merger on the grounds of violation of antitrust laws (Learnmergers.com,
2008).
Horizontal Merger – Horizontal mergers involves two firms that operate and compete
in a similar kind of business. It is supposed to provide economies of scale due to a
larger combined unit (Learnmergers.com, 2008). These are the most common types of
mergers and take place more frequently as compared to Vertical mergers. India has
witnessed many such mergers in the Cement industry – Birla with L&T, Liquor
industry - United Breweries with Shaw Wallace, Aviation industry – Jet Airlines with
Air Sahara.
This type of merger provides many benefits like elimination of state of art facilities
and operations that are duplicate in nature, diversification of the product line,
reducing the expenditure on working capital of the company, reducing the R&D
expenditure, increasing customer base through time and place utility and most
importantly, cutting off competition through better concentration of products.
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However, horizontal mergers are more likely to be challenged on competition grounds
as compared to vertical and conglomerate mergers (Dhall, 2006).
Conglomerate Merger – A conglomerate merger is a merger that is neither horizontal
nor vertical. This merger deals with amalgamation of two companies that are engaged
in unrelated industries. According to the U.S. Supreme Court a Conglomerate Merger
is one in which there are no economic relations between the acquiring and the
acquired company (Schlossberg, 2005). The basic purpose witnessed for this type of
merger is either Tax incentives, utilization of financial resources or enlarged debt
capacity.
Gabrielsen (2003) suggests that many mergers that on the surface appear to be
conglomerate also have a vertical ‘flavour’ because they often involve the acquisition
of the target’s distribution network.
Cross-Border Mergers – This is not actually a different type of merger. Cross-border
mergers is just a nomenclature used to denote that a merger involves two companies,
both situated and/or operating in different countries.
3.3 Cross-Border M&As
Specific research on cross-border M&A is scarce, as compared to M&A in general
where comprehensive research work is available. However, there has been a rise in
research on cross-border M&As, which can be mainly attributed to the dominant role
15
played by it in the globally. According to Thomson Financial, cross-border mergers
and acquisitions accounted for a record 47% of worldwide M&A transactions in 2007.
3.3.1 Historical Rise in Cross-Border M&As
Cross-border M&As are the main force behind the surge in Foreign Direct Investment
(FDI) (Finkelstein, 1999). Though cross-border mergers and acquisitions represent a
percentage of all mergers and acquisitions, they are a large and growing part of all
Foreign Direct Investment (Hopkins, 1999). Table 3.1 shows that cross-border M&As
constitute a main vehicle for FDI, especially for FDI flows to developed countries.
According to the UNCTAD World Investment Report (WIR) 2000, cross-border
M&As have become a more popular entry mode to transnational companies and they
account for 80% of the world FDI. In 2000, global cross-border M&As peaked in
numbers & value with 7894 deals and US$ 1, 144 billion respectively.
Table 3.1 - Cross-border M&A investments (% of FDI inflows to the host countries)
1987-91 1992-94 1995-97 1998-2001

World 66.29 44.75 60.18 76.23
Developed Countries 77.49 64.93 85.39 88.96
Developing and Transition Economies 21.94 15.49 25.79 35.74
Source: Barry, Navaretti and Venables (2004, p.10).
The growth in cross-border M&As can be attributed to various factors. Liberalisation
of FDI gives the transnational companies an impetus to expand their businesses
internationally. India has recently reduced restrictions on foreign entry & released
many industries that were earlier closed to FDI like Telecom and Cement. The FDI
impact on after the liberalization in India is seen in Table 3.2.
16
Table 3.2 – FDI Inflows in India from 2000 – 2007
Financial Year FDI Inflow (US $ Million)

Apr 2000-Mar 01 4,029
Apr 2001-Mar 02 6,130
Apr 2002-Mar 03 5,035
Apr 2003-Mar 04 4,322
Apr 2004-Mar 05 6,051
Apr 2005-Mar 06 8,961
Apr 2006-Mar 07 22,079
Apr 07 - Dec 2007 15,341
Source: India FDI Report: 2007
Another reason for increase in cross-border M&As is the deregulation of services.
This removes the barrier for transnational companies to exploit the emerging
industries & extract atypical profits. Combined with this, the Privatization of state-
owned enterprises & reduction of control provide multinational companies with ample
opportunities to execute a cross-border M&A.
3.3.2 Recent Downturn
The slowdown in the world economy and the credit crunch hitting the globe, cross-
border M&As have experienced a slump too. This slump in cross-border M&As is the
most imperative downturn in the past three decades (UNCTAD WIR, 2002). As
mentioned above, cross-border M&As peaked in 2000 & conversely, 2001 saw the
biggest decline. The value of cross-border M&As dropped by almost 50% from US$
1,143,816 million in 2000 to US$ 593, 960 million (UNCTAD WIR, 2002). In 2003,
it abated a further 20% from US$ 369, 789 million in 2002 to US$ 296, 988 million
(UNCTAD WIR, 2004). Figure 3.1 shows the Global cross-border M&As’ value &
growth rate from 1988 to 2006
17
Figure 3.1 - Global Cross-Border M&As, Value and Growth Rate, 1988-2006
Source: UNCTAD WIR, 2007
Though the decrease in recent cross-border deals is attributed to the slowdown of the
economy, another important reason is the end of privatization in most developing
nations. This is contrary to the period before 2000, where privatization was at its
peak. Total state-owned assets sold fell from US$ 50 billion in 2000 to US$ 20 billion
in 2003 (UNCTAD WIR, 2004). Also the tumbling stock markets contributed to the
slowdown of cross-border M&As. As the value of stocks traded in world’s 49 stock
markets declined by 15%, to US$ 22 trillion, the value of M&As also decreased by
38% in 2003 (UNCTAD WIR, 2003)
3.3.3 Characteristics of Cross-Border M&As
Increase & decrease in the cross-border M&As echo the trend of the world economy
to a great extent. Despite the ups & downs, the international M&As have shown some
distinct characteristics. First, it is seen that cross-border M&As are more of an
18
acquisition type rather than a merger. In other words, a controlling stake in a company
was acquired by the other company. In the period ranging from 1987 to 1999, 97% of
the cross-border deals were acquisitions (UNCTAD WIR, 2000). In 1999 alone, half
the M&As were an acquisition of complete nature i.e. where the foreign interest was
more than 50%.
Second, most cross-border M&As are of the horizontal type. This characteristic
proved correct till 2000, where over 60% of the total value of cross-border M&As
were horizontal. Approximately 30% of them were conglomerate and less than 10%
were vertical mergers (UNCTAD WIR, 2000). However, in the recent years, no such
particular trend is noticeable.
Third, a vast number of cross-border M&As are friendly. In the 1990s, about 95%
cross-border M&As, in terms of both value and number of deals, were friendly i.e. not
hostile (Kang and Sakai, 2001 p.23). Also it was witnessed that hostile cross-border
M&As were more in industrial economies.
The fourth characteristic is a trend indicated by the cross-border M&As taking place
globally. Earlier, deals were concentrated in a few developed nations. However,
recently transnational companies in the developing economies have begun to play a
pivotal role in cross-border M&As. For example, more & more Indian companies are
on a buying spree overseas, with Tata Sons & Ltd. Topping the list. The recent
acquisitions of Corus & Jaguar by Tata group of companies, rings a bell for the world
hollering the significant role of developing nations in cross-border M&As.
19
3.4 Motives for Cross-Border M&As
Research on the effect of cross-border M&As on firm performance focus on
indicating whether cross-border M&As can create wealth to shareholders or not.
Cross-border acquisitions can provide benefits to acquiring firms that might not be
fully realized by their shareholders through cross-country portfolio diversification.
Therefore, cross-border acquisitions may increase the value of a firm (Kiymaz, 2003).
From the perspective of FDI, the source of wealth creation of cross-border M&As lies
in the advantages of international production. Investment by acquiring foreign assets
enables transnational companies to take advantage of the imperfections in factor
markets as well as in the international financial markets. Imperfections in the host
country’s capital market may allow a multinational acquiring firm to dig out
monopolistic returns (Conn & Connell, 1990). This is in accord with Kogut’s (1988)
argument that the primary advantage of a multinational firm, as opposed to a national
corporation, lies in the swift ability to transfer resources across borders. Once the
merger is announced, it is the degree to which the multinational firm can manage
institutional restrictions, seize informational externalities and capitalize on the
production economies that will decide its effect on investors. This effect is reflected
by the stock price movement of the company.
The Eclectic Paradigm used in FDI research, provides an explanation on the motive of
foreign acquisition. Recent technological advances, more intensive inter-firm
competition and increasing mobility of particular firm- specific assets, have led to
new motives for multinational firms to have a foreign production facility (Dunning,
2001). The Eclectic Paradigm argues that cross-border M&A activity in undertaken to
20
create wealth by internalizing the acquiring firm’s ownership-specific merits in
foreign locations (i.e. financial, technological, informational and organisational)
(Gonzalez et al, 1997). According to the ‘Internalising’ theory, organisations that
have a superior technical and managerial know-how fear the seepage of it if they
invest through joint ventures.
There exists a reverse internalizing motive of cross-border M&As that has not
received a due interest as yet. As pointed out by Eun et al, (1996), a cross-border
acquisition is also undertaken to get the superior technical & managerial know-how.
This will then enable the acquirer to use the newly purchased expertise to earn
abnormal or normal profits.
One important aspect of understanding cross-border mergers and acquisitions is to
examine the strategic, market, economic & personal motives. Strategic motives
revolve around capitalizing on a firm’s core competence, increasing market power
and creating synergy (Hopkins, 1999). However, Sirower (1997) argues that synergy
does not always justify the premium paid for the acquisition. He believed that
NPV = Synergy – Premium, & that acquiring firms should realise this. Market
motives are basically related to entering a new market in a new country. M&As is the
most efficient way to do it, as it saves the audacity of setting up business in a new
market. The Economic motives do not include only the advantage of economies of
scale. It also relates to be able to reduce costs due to eliminating redundancy of
resources like technology, materials etc (Hopkins, 1999). The Personal motives are
dominated by the famous jargons of Agency Problem & Management Hubris.
21
However, these motives are more of a general view, rather than for a cross-border
M&A. Ghoshal (1987) developed a framework to better understand the objectives
behind a cross-border M&A. This framework is summarized in Table 3.3. According
to the table, Ghoshal indicates that national differences within the firm due to cross-
border acquisitions would largely enable the firm to move operations to the lowest
cost country. This would also help to improve the firm’s ability to cope with the risks
from changes in market and government policy, and improve the ability to learn and
adapt because of the different strengths associated with the culture of different
countries. Also Ghoshal specifies that economies of scale & economies of scope drive
a cross-border M&A, which eyes the greater efficiency in each activity of the value
chain, lower risk and business diversification among other things.
Table 3.3: Global Strategy: An Organizing Framework
Sources of Competitive Advantage

Strategic Objectives National Differences Scale Economies Scope Economies
Sharing of
Benefiting from Expanding and investments
Achieving efficiency diferences exploiting potential and costs across
in current operations in factor costs–wages scale economies in products,
and cost of capital each activity markets, and
businesses
Managing different
kinds of risks arising
from market or Balancing scale Portfolio
policy-induced with strategic and diversification of
Managing risks
changes in operational risks and creation of
comparative flexibility options and side-bets
advantages of
different countries
Shared learning
Learning from
Benefiting from across organizational
societal differences in
Innovation learning experience–cost components in
organizational and
and adaptation reduction and different
managerial processes
innovation products, markets, or
and systems
businesses
Source: Ghoshal (1987)
22
Country specific factors cannot be forgotten when discussing the motives of cross-
border M&As. Country-specific factors refer to the reasons that attract certain
companies towards another for acquisition in a particular country. These factors could
be the political stability, inflation, GDP or plainly the desire to invest in that country.
Kummer (2006) carried on a research to determine these country-specific factors that
Indian companies consider for a cross-border acquisition. He collected data for all
M&As from 1995 to 2005 period and considered factors like GDP, GDP growth,
GDP per capita, inflation and economic freedom as the main criteria of research. He
concluded in his research that GDP & Economic Freedom of the target country were
statistically the most significant factors (73%) considered by Indian companies.
3.5 Performance of Cross-border M&As
In spite of the huge volume of activity in the cross-border M&As, an inevitable fact
emerges upon close examination of these deals – the majority of cross-border M&As
are not successful (Finkelstein, 1999). According to economists David J. Ravenscraft
and William F. Long (1993), most of the 89 acquisitions of American companies by
foreign buyers between 1977 and 1990 they studied did not improve operational
performance even one year after the acquisition. However, whether one year is a
sufficient time frame to judge a merger is subjective. The Sony Corp acquisition of
Columbia Pictures in 1989 is even today is a classic case study of what not to do in a
cross-border merger deal.
23
Though a theoretical study of cross-border M&As depict that they generally result in
wealth creation to a large extent, the empirical evidence has given a rather uncertain
view. Shimizu et al (2004) suggested three streams of research to gauge the
performance of a cross-border M&A. The first stream by far deals specifically with
the post – merger performance on bases of theoretical analysis of cross-border M&As.
The second stream comes from the common finance literature and scrutinizes the
wealth creation to shareholders. These are basically referred to as ‘event studies’ and
is primarily done by comparing the share price prior and after the M&A
announcement (Cebenoyan et al, 1992; Andre et al, 2004; Markides & Ittner, 1994;
Cheng & Chan, 1995; Goergen & Renneboog, 2004). To get a better picture of the
performance a comparison between the wealth creation of cross-border M&A and
wealth creation by domestic M&As.
In a research conducted by Morck & Yeung (1992) to ascertain wealth creation by US
domestic M&As, they found that the acquiring companies were able to make some
amount of abnormal profits. Markides & Ittner (1994) examined a different dataset for
the same result. Kang (1993) tested the wealth effect for US firms acquired by
Japanese companies during 1975–1988 and found that merger created wealth for both
acquirer and target firm shareholders. In other words, the markets reacted
significantly positively to the takeover announcement. Kang (1993) also suggested
that the wealth creation in most cases here was because of the dollar depreciation in
relation to the Japanese yen. The effect of exchange-rate movements on Japanese
bidders was statistically imperative and efficiently large. However, this exchange-rate
criteria for abnormal gains in a cross-border M&A, i.e. the strength of the acquiring
24
countries’ home currency has proved to be a negligible variable by many researchers
(see Danbolt, 2004; Cakici et al, 1996; Dewenter, 1995).
Contrary to the above, there have been many researches to show that cross-border
M&As do not augment the wealth of acquiring company while it does benefit the
target firm’s shareholders much more. Eun et al (1996) indicated that though on the
surface both the shareholders of acquiring company and target firm create wealth, it is
not as clear as it looks. He pointed that the target companies in many instances had a
Cumulative Abnormal Return (CAR) so high that it compensated for the negative or
low CAR of the acquiring company. Eun et al (1996) also found that the performance
of the acquiring company was to a large extent country specific. Cheng and Chan
(1995) studied 88 international mergers where the target companies were from US.
They studied US target firms for 2 separate sets, first where the acquiring or bidder
company was a UK company and second, where the acquiring company for any other
foreign company other that UK. The study revealed that the US target firms
undoubtedly earned abnormal gains. Though there was a difference in the level of
abnormal gains earned by US targets in case of UK & non-UK acquirers, Cheng &
Chan studied that the difference was not significant. Cebenoyan et al (1992) studied
the difference between the abnormal returns of US target firms in case of foreign and
domestic M&As. They concluded that the US target shareholders captured greater
wealth from foreign acquisitions when the demand for US firms amongst foreign
bidders increased. Earlier, Harris and Ravenscraft (1991) had proved a similar result
concluding that US target firms in foreign acquisitions showed greater significant
positive wealth than those in domestic bids.
25
Besides the above mentioned views on performance and wealth creation by cross-
border M&As, some studies indicate that cross-border M&As do not necessarily
create wealth for shareholders of acquiring firms. Andre et al (2004) examined
Canadian mergers between 1990 and 2000 for long-term performance in domestic &
cross-border M&As. The research suggested that Canadian acquirers considerably
under-performed over a three year post-event period. They also diagnosed that the
CAR to cross-border transactions were significantly negative as compared to the
domestic M&As. One more instance specifying this opinion is the research by
Wansley et al (1983). The research showed that the CAR of cross-border M&As
appeared to be larger than the domestic M&As. However, the authors claimed that the
difference between the CAR of cross-border and domestic M&As befalls to be
irrelevant because there existed no difference existed in the premium paid for the
target company, by foreign bidder or a domestic one, when the payment of the deal
was in cash. Datta & Puia (1995) tested US acquiring companies during the period
1978 – 1990 and found that international acquisitions did not create wealth for the
shareholders of these firms. Goergen & Renneboog (2004) in their research found that
domestic M&As indicated higher wealth creation than cross-border M&As. Eckbo
and Thorburn (2000) seconded this opinion in their research stating that US domestic
made significantly more wealth than cross-border acquiring firms. This highly
challenges the prediction from FDI theories that foreign buyers can exploit the
imperfections in the factors and markets to attain abnormal gains.
Third stream of research as suggested by Simizu (2004), examines post-M&A
performance using relatively longer term measures. Thus instead of assessing the
26
wealth creation only using the stock price, this stream of research looks at long-term
indicators of performance like sales, market power, etc.
However, the above performance parameters are accompanied by risks. Firms
engaging in cross-border M&As are faced with many unique risks such as ‘Liability
of Foreignness’ (Zaheer, 1995), ‘Double Layered Acculturation’ (Barkema et al,
1996) and ‘Information Asymmetry’ (Kogut & Singh, 1988). Liability of Foreignness,
as explained by Zaheer (1995) refers to risks arising for the acquiring firm in a foreign
market because of spatial distance, unfamiliarity with local environment and
restrictions from the host and home country environment. Double-Layered
Acculturation, as mentioned by Barkema et al (1996), refers to cultural barriers in
both the foreign country and the target firm. This may cause the investing company
huge integration costs thus affecting the gains from the acquisition. This to some
extent does oppose the risk diversification theory which proposes that portfolio
diversification across international boundaries improves investors’ risk-return
opportunities.
The above empirical evidences all concern the cross-border M&As involving
companies in developed countries taking over international firms. As far as India is
concerned, no doubt there has been such a tremendous growth in cross-border
acquisitions, but there is very few research on it. There are several reason for the lack
of research in India; first, India has entered into successful cross-border M&As
recently. It is only in the last decade or so that India made a statement by its overseas
acquisitions. Thus the experience of acquiring a foreign firm is still new for Indian
businessmen and researchers. Second, the size of acquisitions by Indian firms has
27
been small in comparison to that of developed country firms. Even in the developed
economy, the cross-border M&A literature focuses on large acquisitions. However,
there have been some large scale acquisitions by Indian firms which have facilitated
some research. Lastly, the lack of availability of data regarding the M&As has proved
to be a major hindrance in the research.
With the available research on Indian cross-border M&A, we can discuss the
following empirical evidence. Malhotra & Zhu (2006) conducted a research on 96
Indian firms that acquired US companies during the period 1999 to 2005. They tested
the returns for short term and for long term. Their research showed that the Indian
market had a positive response to the announcement of the Indian acquisition of US
firms. The returns in the first three days of the announcement proved statistically
significant. For testing the long-term wealth creation, Malhotra & Zhu (2006),
compared the monthly returns of the sample firm stocks with the local market index
benchmark i.e. the Bombay Stock Exchange index of 200 stocks (BSE200) for a 2-
year post-acquisition period. They found that the acquiring firms’ stocks consistently
underperformed the market benchmark. This research also tested impact of
international acquisition on the firm’s operating variables like sales growth, profit
margin, ROE, EPS, foreign export sales and market riskiness (stock price volatility)
of the company. The results derived were quite interesting. The difference between
the growth rate of sales and foreign export sales in the pre-acquisition and post
acquisition period, showed a positively significant difference. However, other
variables like profit margin, ROE and EPS showed a negative significance. The last
operating variable – firm’s riskiness i.e. volatility indicated that the riskiness reduced
significantly after the international acquisition.
28
Malhotra & Zhu (2008) conducted another research in 2008 using similar parameters.
Their quest, however, this time were many other empirical results that most
researchers miss. In this report they tested the Price Pressure Effect (see Scholes,
1972 and Kraus & Stoll, 1972) on the abnormal returns at the time of announcement
of the acquisition. They found that in almost cases the price pressure effect i.e.
abnormal trading volumes were positively significant.
Earlier empirical evidence has suggested that, First – larger the size of acquisition or
transaction, larger is the abnormal returns on acquiring firm’s stock (Asquith et al,
1983; Jarrel & Poulsen, 1989; Servaes, 1991). Second, evidence suggests that
acquisition of listed companies result in zero or negative CAR and vice-versa (Chang,
1998; Fuller et al, 2002). Third, some evidence show that an acquisition in a related
industry results in higher CAR for acquiring company (Morck et al, 1990; Moeller et
al, 2003). Finally, Harford (1999), suggested that acquiring companies who are cash
rich, tend to make value-decreasing investments and thus result in negative CAR
during announcement date. All the above parameters were empirically tested by
Malhotra & Zhu (2008). They found that in case of Indian companies acquiring
international firms, none of the above parameters proved significant. This indicates
that the abnormal returns in India are largely based on price pressure effect rather than
informational effect.
29
Chapter 4 – Measures of Performance of Cross-Border M&As
Researchers worldwide have developed four main approaches to measure the success
of mergers & acquisitions, which are –
1) Accounting Studies – This study utilizes the financial statements & accounts of
the acquiring company to evaluate the performance of the company after the
merger.
2) Event Studies – This study evaluates the returns earned by investors during the
time period of the date of announcement of the merger or acquisition.
3) Survey of Executives
4) Clinical Studies
4.1 Evaluating Performance by Accounting Study
As the name suggests, Accounting studies involve evaluating a merger deal with the
help of accounting measures (Kaplan, 2006). It is based on the financial results of
companies and these results are used to test the company’s performance after merger
as compared to its performance before the merger. Accounting study can be
conducted only after the merger or acquisition is completed, unlike Event study,
which is generally conducted during the time of the announcement of the merger.
Accounting study uses financial ratios as the main tool to study the changes in the
financial performance of the company. Financial ratios like Return on Equity (ROE),
Return on Assets (ROA), Earnings per share (EPS), Profit-Earning ratio (P/E Ratio)
30
etc are some of the tools that do facilitate this study. Accounting study offers the
researcher evidence as to whether the merger is giving the acquiring company an edge
over their competitors (Bruner, 2002)
There have been some researches carried out to assess the success of a merger or
acquisition using accounting studies. These researches have been attempts to evaluate
the firm’s success not only in business but also its managerial strength and its ability
to pay its debt after taking into account the merger payment & other costs (Courtis,
1978; Barnes, 1987). Caves (1989) studied the profitability of 38 merged companies
in the year 1967-68. He examined that almost half of the companies did not earn any
gain, while even the other half earned only mediocre gains. In 1975, Singh found that
out of 77 companies, two-thirds reported lower profits not only in the year of
acquisition, but for as long as three years after the merger or acquisition. Healy,
Palepu and Ruback (1992) used the operating cash flow method to find that merged
companies showed higher operating cash flows which were a result of higher asset
productivity post-merger. However, Ghosh (2001) found that there was no evidence
of improvement in the operating cash flow of the merged companies post acquisition.
Ravecraft and Scherer (1989) tested 471 acquisitions between 1950 & 1977. Using
financial ratios as their criteria for study, they concluded that there is no significant
increase in profitability post merger.
4.2 Evaluating Performance by Event Study
The occurrence of economic event has shown to have a considerable impact on the
value of the firm to which the event is related to. Considering that the financial
31
markets are efficient, such an impact can be studied. Efficiency of financial markets
signifies that the markets behave rationally and that the effect of the event will be
echoed in the company’s share price. Thus share prices are used to evaluate the
reaction of financial markets, of whether there was a statistically significant change to
past occurrence of a given type of an event and the change in return to the
shareholders in the period surrounding the announcement of an event (Campbell, Lo
and MacKinlay, 1997). In my dissertation I will be using an Event Study approach to
study the impact of cross-borders on the acquiring Indian companies.
Campbell, Lo and MacKinlay (1997) have outlined seven basic steps for conducting
an event study, which do not form a unique structure but still are viewed as a
comprehensive guideline.
Step 1: Event Definition. Identifying the event of interest and defining the period over
which the prices are to be studied (event window) is the first task of an event study.
The event window is generally taken as 2 – 3 days prior to the event and 2 – 3 post-
event. However, depending on the research and researcher, the period can be selected.
It is customary to define the event window to be larger than the specific period of
interest (MacKinlay, 1997).
Step 2: Selection Criteria. Once the event is identified, a selection criteria needs to be
set for a firm to be considered in the study. These criteria involve restrictions like
listing on a stock exchange or size of transaction etc.
32
Step 3: Normal and Abnormal Returns. To assess the event’s impact we need to
calculate the abnormal returns of the share price over the event window. Abnormal
return is described as the returns generated by a given security over a period of time
that is different from the expected rate of return (Investopedia, 2008). The abnormal
returns are calculated as the excess over the normal returns. Normal returns are
defined as returns that would have occurred if no event had taken place.
Step 4: Estimation procedure. To test the above parameters, a subset of data is
required called that estimation window. This period is generally a period prior to the
event like taking 180 days prior to the event.
Step 5: Testing Procedure. Once the abnormal returns are calculated, they need to be
checked for statistical significance. This involves forming a null hypothesis and
determining the correct method of testing.
Step 6: Empirical Results. The results of testing the hypothesis need to be
accompanied by a diagnosis of results which may lead to interesting findings.
Step 7: Interpretation and Conclusions. The empirical results diagnosed above need
to be interpreted in a way to prove the objective of the event study and finally make
the concluding comments, wrapping up the study.
Event studies are dominating the field of M&A since 1970s . These studies are
regarded to be ‘forward-looking’ because of the theory that share prices are simply
present value of expected future cash flows to shareholders (Bruner, 2002). There
33
have been numerous empirical research that have been carried out based on event
studies which have been discussed in Chapter 3 – Literature Review. However, there
been some criticisms for this method. Bruner (2002) mentions two major
shortcomings of the event study approach. First, he points that event studies make an
assumption that the financial markets are efficient, rational and that there is no
restriction on arbitrage. This assumption is not true for most stocks or markets thereby
creating an anomaly in the empirical research. Second, he mentioned that an event
study is susceptible to confounding or difficult events which might skew the returns
for the company related.
4.3 Evaluating Performance by Survey of Executives
This study is done by simply enquiring from the executives of the companies about
the value created by the M&A and how they rate the success or failure of the M&A.
Survey studies represent standardized questionnaires for managers to evaluate the
affect of a merger or acquisition on the company. The answers of the executives are
then analyzed to come to a conclusion. This type of evaluation mainly is of the
qualitative type and seldom requires verification by means of any hypothesis testing.
Ingham, Kran and Lovestam (1992) surveyed chief executive officers in 146 large
firms in the U. K. They concluded that 77% of the executives believed that
profitability definitely increased in the short run after the M&A. Yet only 68%
believed that this profitability & performance lasted long run. Theoretically this
approach is extremely useful in cases where it provides insights value creation that
may not be known in the market. This approach is considered to provide an intimate
34
familiarity with the actual success of the M&A. However, this approach fails at the
point of reality where all executives need not be shareholders & their attitude may not
be focused on economic value. This attitude was tested by Bruner (2002) where he
surveyed 50 executives via internet not ensuring participation. He then carried out the
same survey personally. The results of both the surveys were strikingly varying. Also,
the most difficult part of this approach of evaluating M&As is getting the
participation of the executives who do not always readily agree to answer the
questions.
4.4 Evaluating Performance by Clinical Study
Clinical study approach focuses on one company or a small sample of the event in
great depth. This is usually done with the help of field interviews with scholars and
company executives. By doing an in-depth analysis, a researcher can find the actual
motive of the deal and also some new results and reasons. This approach proves
helpful in evaluating the details of a particular transaction as it reconstructs an actual
experience. As mentioned by Bruner and Perella (2004), clinical study is an inductive
research and it helps in discovering new patterns and behaviour in events, mergers
and acquisitions in this case. According to Kaplan (2000), clinical studies have the
potential to identify potential variables that can be used in large sample studies to sort
mergers based on their incentive and probable sources of gain.
It has been empirically proved that clinical study allows a researcher to go from
specific to general. Thus concentrating on one company event or a small sample can
lead to a conclusion on the overall industry impact. This is evident from the various
35
researches conducted like by Lys and Vincent (1995) who studies the AT&T and
NCR merger diagnosing a huge reduction in shareholder wealth. Kaplan, Mitchell and
Wruck (1997) researched two merger deal to identify their success. They concluded
on a general scale about the reasons for failure being incomplete knowledge of target
and inappropriate organizational designs.
There are, however, certain drawbacks of this study that affect the research. First, this
approach is of a qualitative nature and does not include hypothesis test verification,
mainly due to the small observations of the limited sample size used. Second, critics
of this approach feel that a clinical study could be idiosyncratic or peculiar in nature,
obscuring the way to make a larger implication of the event. This can be witnessed in
the research carried out by Ruback (1982). He failed to specify a specific source of
losses to the acquiring shareholders of Dupont and gains to the target firm
shareholders of Conoco.
In my dissertation I am analyzing the impact of an event of merger or acquisition on
the share price to determine the short term abnormal gains that the investors earn. I
have selected event study as the method of evaluating my study mainly because it is
the perfect vehicle for evaluating short-term abnormal gains to shareholders and thus
in a way evaluate the short-term success of the merger. Accounting Study needs at
least 4 – 5 years of balance-sheet data to provide a robust result. Survey of Executives
and Clinical studies do not fit the kind of study that I m doing, as both of them are
more inclined towards the qualitative assessment of a merger or acquisition. Thus I
am using an Event Study to analyze a data of 84 cross-border merger deals between
Indian acquiring companies and European target companies.
36
Chapter 5 – Empirical Study: Data and Methodology
5.1 Data
The discussion about Mergers & Acquisitions, and specifically about Cross-Border
Mergers & Acquisitions gives us one clear indication that M&As are the set to
growing number and value. It is a convenient way to expand in territories beyond.
However, what is to be seen is that how many mergers have actually created wealth
for their shareholders, as specified by their motives. India has seen many cross-border
mergers over the last decade, some successful, some unsuccessful. The growing value
of Indian FDI turnover and the increasing number of deals shows an encouraging
trend in cross-border M&As. Nevertheless, it does not necessarily mean that investors
are being benefited in the short run as well is the long run.
In my dissertation, I am evaluating the performance of M&As by Indian companies
who have acquired foreign firms. I am concentrating on the cross-border mergers that
have taken place between Indian and European firms. The performance is judged on
the basis of the abnormal returns that the merger has generated for the investors. I
have chosen a time horizon from 2000 to 2008 and have taken into account the M&As
of European companies by their Indian counterparts. The data is collected from
Reuters and Bloomberg and was sourced from Ernest & Young.
For collecting data the following criteria was used:
1) Deal period is 2000 to May 2008
2) The acquiring company is Indian
37
3) The target company is not Indian, preferably European
4) Deal status is either complete or unconditional
The data collected was quite satisfactory and it fulfilled all the above criteria. The
data was collected such that it provided the information about the ‘Names of the
Acquiring and Target Companies’, ‘The Acquisition Announcement Date’,
‘Transaction Value’, ‘Sector of Business’ and other related information. Here the
announcement date of the merger, or more generally the event date is of significance
as all calculations are based around it. However, according to Henderson (1990) the
accuracy of the event date is a potential problem influencing the command of an event
study. He argued that the main point of interest is not the date of the announcement of
the event. It is the time when the market, to say the most concerned and well informed
segment, could have expected the news. Nevertheless, for all practical purposes we
assume that the announcement date provided by the financial data is correct.
The base data consists of 144 deals between Indian & European companies over the
specified period. It is interesting to note that majority of the M&A activity is
concentrated only on few countries in Europe, namely UK, Germany, France and
Italy.
Figure 5.1 shows the country wise distribution of the merger deals as well the total
transaction amount in million US$ in each country. It is clear that UK is the hot target
for Indian businessmen who go shopping for businesses in Europe. It has the highest
percentage of deals in the given period – 36% deals. Evidently, UK has the highest
amount of transaction value of US$ 18,028 million. This huge transaction value is
38
backed by the famous Tata Steel-Corus and Tata Motors-Jaguar deals which
aggregated US$ 14,239 million. Germany Ranks second at 18% deals and total deal
value of US$ 3010 million, followed by France & Italy (8% and 7% respectively). All
countries that have deals less than 5% of the total, are included in the “others”
category. These include countries like Switzerland, Spain, Romania, Bulgaria, Ireland
etc. Romania stands out in this list, as, with only 2% of the number of deals, the total
deal value is US$ 407 million – almost close to Belgium & Italy.
Figure 5.1: Country-wise Disrtibution of Deals & Deal Value (USD millions)
40% 20000
35% 18000
16000
30%
14000
Deal Value
% of Deals
25% 12000
20% 10000
15% 8000
6000
10%
4000
5% 2000
0% 0
Belgium France Germany Italy UK Others
Country
Deals Deal Value
Another interesting trend noticeable from the data is that, of the 144 merger deals,
52% of the acquisitions done by Indian companies were a re–buy. In other words,
52% of the Target firms had been acquired by someone else earlier and now were
being sold again due to the buyer’s bankruptcy or redundancy. The data also brings in
front the fact that only 28% of the target companies in my collected data are listed
companies. A minor 7% are subsidiaries while 64% of the target companies are
private firms. Further analysis reveals that Indian companies do not engage in M&A
39
for the motive of Diversification but for Expansion. This can be said as 68% of the
deals in my data are in the same area of business while only 10% deals show
diversification. Out of the remaining, 13% shows backward Integration while 10%
deals show Forward Integration.
To improve the accuracy of the results of the study, the data is narrowed down from
the 144 deals to 108 deals made by publicly listed Indian companies of European
firms from 2000 to 2008. It is very difficult to obtain true and fair deal information if
the acquiring company is not publicly listed. Also the authenticity of data is lost in
case of a Private Equity deal or a Private Investor. Thus, such deals were removed
from the dataset.
Share price data of each acquiring company was collected from the National Stock
Exchange (NSE) web-site www.nseindia.com and from the Bombay Stock Exchange
(BSE) web-site www.bseindia.com. As the share price data was been collected,
several missing information came into picture. This was due to cases where the
merger has taken place before the public listing of the company or only a few days
after. In both cases, it becomes difficult to assess the past performance and hinders the
setting up of the estimation period (explained in the next section). Such cases resulted
in the data being reduced to 84 publicly listed Indian companies.
The daily trading volumes of all the companies were also collected from the NSE and
BSE website. Trading volumes are useful to test the impact of abnormal trading
volumes during the time of the merger or acquisition. The share price data that was
collected also had cases where there was a bonus or stock split or dividend during the
40
period selected for study. In such cases the price & the trading volume were adjusted
such that the returns were not affected.
5.2 Methodology
This Section explains the methodology used to calculate the abnormal returns and
abnormal trading volume for the event of merger. This section also explains the
relevant hypothesis tests to check the significance of the results.
A standardised event analysis is adopted to evaluate the impact of cross-border M&As
on the Indian acquiring firms’ stock price and the abnormal returns to shareholders. I
am analyzing the cross-border M&As of Indian acquiring companies with that of
European target companies. An event window is set up taking into consideration five
days (D –5) prior to the announcement date and twenty days (D +20) after the
announcement date to gauge the short term effect of the merger or acquisition. To
assess the market reaction to the M&A announcement, I need to calculate the normal
returns for an estimation period, which is supposed to be before the event date. I have
used a period of 150 to 30 days prior to the date of announcement as the estimation
window, i.e. 4 months before 30 days of the announcement date.
There is no fixed rule about selecting the time period of the estimation window. I have
selected the estimation window as –150 to –30 because according to me, 4 month
historical returns provide a sufficient background for calculation of normal gains.
Similarly, even the selection of the event window is up to the researcher’s choice. I
have considered D –5 as according to me, previous 5 day abnormal return would give
41
a satisfactory picture of the event background. On the other hand, considering D +20
helps me decipher the extent of impact that the event has on the abnormal gains.
5.2.1 Calculation of Abnormal Returns
To calculate the abnormal returns, I have used the ‘Constant-Mean Return Model’.
According to this model, the expected market returns from the stock is considered to
be constant. There are other methods used in various previous researches, the most
common being ‘Market Model’. The Market Model assumes a linear relationship
between the return of a stock and the market portfolio. Thus according to the Market
Model,
Ri ,T = α i + β i Rm,T + ei ,T (1)
with E (ei ,T ) = 0 and Var (ei ,T ) = σ e2
where T is the time index, i = 1,2,..., N stands for security, and Ri,T and Rm,T are the
returns on security i and the market portfolio respectively during period T, and ei,T is
the error term for security i.
According to Brown and Warner (1985), in case of short term analysis, the Constant-
Mean Return Model and the Market Model give similar results. Considering that my
study is concentrating on short term impact, the method of calculation of abnormal
return does not impact its robustness.
42
As mentioned in the section 5.1, there are 84 merger deals taken into account for the
study. The daily stock returns (Ri ,T ) for each stock (i), is calculated for the estimation
period (T) using the formula
⎛ S ⎞
Ri ,T = LN ⎜⎜ i ⎟⎟ (2)
⎝ S i −1 ⎠
where S i is the price of stock i and S i −1 is the price of that stock one day before.
The normal return is calculated as the mean of the daily returns of each stock i, in the
estimation period as,
−30
∑R i ,T
Ri = t = −150
(3)
(−30) − (−150)
Once the normal return is achieved, we can calculate the abnormal returns by
subtracting the normal return ( Ri ) from the daily stock returns of each stock in the
event period (i.e. D –5 to D +20).
ARi ,t = Ri ,t − Ri (4)
where t is –5 to +20.
The abnormal returns are calculated for each merger event i.e. for each company.
43
5.2.2 Statistical Tests for Abnormal Return
The abnormal returns calculated show that there are gains to the shareholder specific
to the event of merger. However, the impact of the merger on these abnormal returns
needs to be statistically proven to be significant. Thereby, the relevant test statistic is
conducted for each time period in the event window. If it is proved different, then the
acquiring firm’s shareholders do realise abnormal returns at the time of announcement
of the foreign M&A. This is done using a simple one-sample t-test, which verifies
whether the abnormal return is statistically different from zero or not. All statistical
calculations are done using SPSS software version 14.0.
A one-sample t-test is one of the basic statistical tests. It compares the mean of a
sample to a hypnotised value of the population (Malhotra, 2006). This value is
generally the mean of the population. The one-sample t-test assumes that the
dependant variable is normally distributed (Malhotra, 2006). In my study, the sample
is the event window (D –5 to D +20) while the population is considered as the
estimation window (–150 to –30). Since the population mean is 0.00, the sample
mean, in my study is compared to zero. The null hypothesis, thus, is that the mean
abnormal return of the event window is equal to the mean abnormal return of the
estimation window i.e. μ AR = 0 .
Another variable that I calculate is the Positive Value. Positive value is the ratio of
share price increase versus a share price decrease on each day of the event window. It
is expressed as a percentage for the purpose of simplicity of understanding and
44
calculations. We can run a test to find the significance of the share price increase or
decrease. It is a non-parametric test and is known as Wilcoxon Signed Ranked test.
The Wilcoxon Signed-Ranks test analyses the difference between the paired
observations, taking into account the magnitude of the differences (Malhotra, 2006, p.
485). In my study the magnitude of difference is defined as greater than 0 (for a price
increase) and less than 0 (for a decrease in price). Thus I analyse the abnormal returns
with an observation of 0. This will give me the significance of all the Positive Values
that I calculated.
5.2.3 Calculation of Cumulative Abnormal Return
For the calculation of cumulative abnormal return, I need to first calculate the average
of individual day’s abnormal return to get the sample abnormal return ( ARt ) or the
Aggregate Abnormal Return ( AARt )
∑ AR i ,t
AARt = i =1
(5)
N
Though abnormal returns give the impact of the merger on the share price of the
company, we still need to test the persistence of the impact of the event during small
sub-periods in the event window. Thus a Cumulative Abnormal Return (CAR) is
calculated for a varied period in the event window defined as CAR(T2,T1). CAR is
calculated as
45
t2
CAR (T2 , T1 ) = ∑ AARt (6)
t =t1
5.2.4 Price Pressure Hypothesis
The above tests, quantify the impact of the event of merger on the abnormal returns.
However, there has been evidence to show that abnormal returns can also be
influenced by price pressure or a sudden demand/supply shock rather than by the
informational effect of the event. Mitchell, Pulvino and Stafford (2004) first
established that short-term abnormal returns earned by US acquiring firms might have
been underestimated due to absence of price pressure effect in the studies. The
existence of price pressure was explained by them by the behaviour of institutional
investors. According to Mitchell, Pulvino and Stafford (2004), the M&A arbitrageurs
purchase the target firm’s stock & short sell acquiring firm’s stock, causing a
temporary deviation of the stock price from its stability.
The price pressure effect does not follow the efficient market hypothesis. Efficient
market hypothesis suggests that theoretically, the demand curve of a security is
perfectly elastic. However, some researches dispute that demand curve of a security
can see a temporary downward slope. The concept of price pressure effect was
proposed by Scholes (1972) and Kraus and Stoll (1972). Unlike information effect,
price pressure affects the price temporarily and the return trend will reverse in a few
days (Malhotra and Zhu, 2008).
46
To test for this price pressure effect, I have used the methodology proposed by
Michaely, Thaler and Womack (1995). They proposed that, if the security demand
curve is downward sloping in the short term, the prices may be influenced by the
excess demand or supply. However, my study differs from that of Michaely, Thaler
and Womack (1995) as my study, unlike theirs, is based on cross-border M&As in
developing country. The best indicator of the demand/supply shock in a stock is its
trading volume. Accordingly, I need to calculate the Abnormal Trading Volumes
(AV) of each stock around the time of M&A announcement date, i.e. the event
window.
The steps to calculate the Abnormal Volume is quite similar to that of abnormal
returns. The ‘Normal’ Trading Volume is calculated as the average trading volume
( Vi ) in the estimation period i.e. –150 to –30 days
−30
∑V
t = −150
i ,t
Vi = (7)
(−30) − (−150)
The abnormal volume ( AVi ,t ) is calculated as the daily trading volume of stock i on
day t, divided by the ‘normal’ trading volume calculated in equation (7), minus 1
⎛ Vi ,t ⎞
AVi ,t = ⎜⎜ ⎟⎟ − 1 (8)
⎝ Vi ⎠
To test the significance of the abnormal trading volume, I again run the one-sample t-
test. The null hypothesis is that the mean abnormal trading volume during the event
47
window (sample mean) is equal to population mean. The population mean is
calculated to equal to -0.00648. Hence the null hypothesis is μ AV = −0.00648 .
The above explained methodology yielded results which have been depicted and
interpreted in the next chapter.
48
Chapter 6 – Results and Analysis
Though there have been many previous researches involving event study of mergers
and acquisitions, majority have concentrated on M&A in developed countries. There
has been very limited research for M&As in developing countries, and even scant
research on cross-border M&As. My dissertation intends to explore this area of
financial research.
6.1 Abnormal Return Analysis
Following the methodology, explained in the previous chapter, I obtained the
abnormal returns for each of the 84 cross-merger deals. These abnormal returns are
sorted for each day of the event window for all the companies in the data set. Thus a
mean AR is obtained for each day in the event window. Figure 6.1 shows the average
abnormal returns calculated from the data for the event window.
Figure 6.1 – Average Abnormal Returns during the Event Window
1.4000%
1.2000%
1.0000%
0.8000%
0.6000%
0.4000%
0.2000%
0.0000%
-2
-1
+1
+2
+3
+4
+5
+6
+7
+8
D 9
-5
-4
-3
D 0
D 1
D 2
D 3
D 4
D 5
D 6
D 7
D 8
D 9
0
-0.2000%
+
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+2
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
-0.4000%
-0.6000%
49
Table 6.1 summarises the results and the statistical tests of the abnormal returns
obtained by the shareholders of the acquiring firm.
Table 6.1 – Average Abnormal Return of Acquiring Firm’s Stock and Test Results
Wilcoxon Signed
Ranked Test
Average Std. Positive T-test P Values
Day AR (%) Deviation. Value (%) Value (t) z (2-Tailed)
D –5 0.0026 0.023 51.25 0.010 -0.048 0.962
D –4 0.0350 0.029 56.25 0.108 -0.681 0.496
D –3 0.0096 0.035 47.50 0.025 -0.005 0.996
D –2 -0.1200 0.037 46.25 -0.287 -0.101 0.920
D –1 0.7479 0.040 53.75 1.674* -1.424 0.154*
D0 1.2314 0.040 65.00 2.781*** -2.844 0.004***
D +1 0.5800 0.043 61.25 1.218 -1.386 0.166*
D +2 0.1595 0.027 52.50 0.536 -0.700 0.484
D +3 -0.0131 0.030 47.50 -0.039 -0.379 0.705
D +4 0.0313 0.026 47.50 0.107 -0.158 0.874
D +5 0.4018 0.035 47.50 1.014 -0.005 0.996
D +6 -0.0663 0.026 50.00 -0.226 -0.552 0.581
D +7 0.1994 0.027 50.00 0.662 -0.566 0.571
D +8 -0.1062 0.023 45.00 -0.420 -0.796 0.426
D +9 0.0105 0.026 46.25 0.036 -0.312 0.755
D +10 0.0374 0.026 48.75 0.128 -0.192 0.848
D +11 0.2836 0.024 50.00 1.049 -0.441 0.659
D +12 0.0455 0.025 46.25 0.160 -0.168 0.867
D +13 0.0625 0.029 53.75 0.190 -0.499 0.618
D +14 0.0641 0.024 48.75 0.241 -0.153 0.878
D +15 0.1010 0.022 48.75 0.413 -0.158 0.874
D +16 0.2318 0.027 56.25 0.775 -0.868 0.385
D +17 0.1322 0.026 46.25 0.464 -0.235 0.814
D +18 -0.3793 0.027 46.25 -1.255 -0.787 0.432
D +19 0.2182 0.025 46.25 0.773 -0.139 0.889
D +20 0.3632 0.027 55.00 1.216 -1.228 0.220
*** 1% significance ** 5% significance * 10% significance
The first column of Table 6.1 shows each of the event days in the event window. The
second column reports the average abnormal returns for each of the event days, while
the third column shows the standard deviation of the same. It can be observed, that on
50
the date of announcement i.e. D 0, Indian acquiring companies, on an average gain an
abnormal return of 1.23 %. Unlike the research conducted on cross-border M&As in
India by Malhotra & Zhu (2008), my results show less fluctuation of abnormal returns
from the mean over the period of event window. The highest level of abnormal return
is gained on the date of announcement which is 1.23%. The lowest level of abnormal
gain is –0.0379% is recorded on the 18th Day after the announcement. Overall, the
shareholders of the Indian acquiring firms do earn abnormal gains during the period
of the event window. However, the extent to which these gains are significant to the
event of the merger needs to be seen. I thus conducted the t-test to obtain the
statistical significance of the returns.
The one sample t-test results are shown in the fifth column. The t-test values suggest
the significance of the results calculated. It is evident that the abnormal returns in the
second column are significant for only two days in the event window. The abnormal
return on D –1 is significant at 90% confidence interval while the abnormal return on
D 0 is significant at 99% confidence interval. The t-test indicates that the highest
values of average abnormal return (D –1 and D 0) are statistically significant. In
comparison to the research conducted my Malhotra & Zhu (2008), on US target
companies, my results show fewer significant gains. Hence it implies that the
shareholders of Indian companies which acquired European firms did not create as
much wealth as did the shareholders of Indian companies acquiring US firms.
The fact that on the day D 0 the abnormal gain is significant shows that the
information of the merger does have an impact on the abnormal returns to shareholder
on the day of the merger. However, this impact goes away instantly from the next day
51
of the announcement. This finding is consistent with the Efficient Market Hypothesis
(EMH). According to Fama (1970), it is impossible to consistently outperform the
market by using any information that the market already knows.
This is practically possible due to the Indian financial markets scenario. Indian market
is currently among the top emerging markets. With Foreign Institutional Investors
pouring in huge sums of investment, there has been an augmentation in the volumes
and scale of trading. Indian markets have become, I can say, more efficient than they
were a decade ago. There has been a tremendous growth in all major industries, and
companies have been putting up splendid performance figures. In the past few years,
Indian markets have witnessed huge number of consolidations, stock – splits, mergers
and de-mergers. I would not be wrong in saying that an event in the Indian markets
come as often as a Sunday in a week. Thus the immediate discounting of the merger
news does not come as a surprise.
I conducted the Wilcoxon Signed-Ranks Test which test shows the significance of a
positive or negative gain of the abnormal return. Column Four of Table 6.1 showed
that 65% of the companies reported a positive movement on the date of
announcement. The Wilcoxon test verifies the significance of this positive movement.
The results of this test are shown column Six and Seven. The test results indicate that
the positive movements on D –1 and D 0 are significant. This works as an affirmation
to my one-sample t-test results.
The significance of the abnormal returns, one day prior to the date of announcement
points to a different stream of thought. It gives sparks to the possibility of the
52
information about the merger being leaked and the presence of Insider Trading in the
Indian Stock Markets.
6.2 Cumulative Abnormal Returns Analysis
The Cumulative Abnormal Returns (CAR) shows the persistence of the above
abnormal returns. Figure 6.2 shows the cumulative abnormal returns for the period of
the event window. As seen in the figure, the CAR leaps up after the day of
announcement and then rises rather gradually.
Figure 6.2 – Cumulative Abnormal Returns for the Event Window
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
-2
-1
+1
+2
+3
+4
+5
+6
+7
+8
D 9
-5
-4
-3
D 0
D 1
D 2
D 3
D 4
D 5
D 6
D 7
D 8
D 9
0
-0.50%
+
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+2
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
The graph for cumulative abnormal return shows a rising trend, i.e. it shows that the
effect of merger gives a boost in abnormal returns for as long as 20 days after the
announcement. However, it cannot be said with conviction unless it is verified by
statistical tests. Table 6.2 gives the CAR for different periods and the results of the
statistical tests administered for it.
53
Table 6.2 – Cumulative Abnormal Returns and Test Results
Average Std. T-test
Period CAR (%) Deviation Value
CAR(-1,+1) 2.5592 0.014 9.934***
CAR(-2,+2) 2.5987 0.009 3.300*
CAR(-5,+5) 3.0660 0.012 2.798**
CAR(-5,+20) 4.2634 0.013 3.703***
The Table gives the CAR for different sub-periods. The third and fourth column gives
the standard deviation and T-test value for the CARs. The CAR for 3 day abnormal
return, 5 day abnormal return, 11 day abnormal return and 26 day abnormal return all
are significant. Though the tests for abnormal returns, as shown in section 6.1, were
significant for only 2 days, D –1 and D 0, the CAR is significant for all sub-periods.
The fundamental reason is that the 2 days D –1 and D 0 are in the centre of the sub-
periods. Because of this the high value of abnormal return affects the significance of
the entire sub-period.
6.3 Abnormal Trading Volume Analysis
To verify the impact of a sudden demand/supply shock on the abnormal return, I
calculated the abnormal trading volume. This will indicate whether the price pressure
effect exists over the information of the M&A. The abnormal trading volume is
shown in Figure 6.3. The towers around the date of the announcement (D –3, D 0, D
54
+1 & D +2) show that there was a big surge in abnormal volumes of the stocks. This
implies that the demand/supply shock can be a possible contender, along with the
event of merger, to influence the abnormal returns.
Figure 6.3 – Abnormal Trading Volume for the Event Window
200.000%
180.000%
160.000%
140.000%
120.000%
100.000%
80.000%
60.000%
40.000%
20.000%
0.000%
2
1
0
-5
-4
-3
D 1
D 2
D 3
D 4
D 5
+6
D 7
+8
D +9
D 10
D 11
D 2
D 13
D 4
D 15
D 16
D 7
D 18
D 19
0
D-
D-
+1
+1
+1
+2
+
+
+
+
+
+
D
D
D
D
+
+
+
+
+
+
D
I tested the abnormal trading volumes for significance, to determine its impact on the
abnormal return. The results of the average abnormal trading volumes are shown in
Table 6.3. The last two columns show the standard deviation of the average abnormal
trading volume and the result of the t-test conducted, respectively.
The Table indicates that the abnormal trading volume is significant on various days
around the date of announcement. These results help to show the excess demand
shock on the acquiring firm’s stocks, which generates the temporary positive
abnormal returns in the days around the date of announcement. It is noted that this
effect takes place only after the announcement. This indicates that the effect of merger
55
is lost immediately after the announcement day, which is consistent with the inference
provided in section 6.1.
Table 6.3 – Abnormal Trading Volume and Test Results
Average Std.
Day AV (%) Deviation T-test
D -5 41.502 2.553 1.477
D -4 122.755 8.055 1.370
D -3 190.065 14.308 1.192
D-2 128.318 9.713 1.188
D-1 80.050 4.721 1.529
D0 192.726 5.396 3.205***
D +1 131.404 3.226 3.661***
D +2 124.821 6.430 1.745*
D +3 54.248 3.202 1.533
D +4 67.525 2.869 2.126**
D +5 51.853 2.091 2.245**
D +6 60.135 2.899 1.876*
D +7 49.402 2.480 1.805*
D +8 90.160 5.421 1.498
D +9 15.407 1.260 1.139
D +10 21.581 1.816 1.095
D +11 15.742 1.712 0.856
D +12 5.882 1.896 0.308
D +13 30.151 2.646 1.041
D +14 61.126 5.688 0.971
D +15 25.994 2.954 0.807
D +16 66.671 4.955 1.215
D +17 58.269 4.115 1.281
D +18 56.458 5.771 0.885
D +19 29.675 3.130 0.866
D +20 36.742 3.526 0.949
It can be witnessed here that though the abnormal returns on the day of announcement
are significant in all the tests, the trading volumes on that day are also significant. It is
the price pressure effect that contributes for the positive abnormal return earned by
the shareholder. Overall, the abnormal trading volumes showed a greater level of
56
significance with the abnormal returns. This indicates that the price pressure effect is
more influential than the event of merger.
The Table 6.3 also shows that the price pressure effect is significant only till about a
week from the date of announcement. This infers that positive gains significant to the
price pressure are created only in the initial days of the merger.
57
Chapter 7 – Conclusion and Limitations
7.1 Conclusion
My dissertation was aimed at studying the impact of the event of a merger or
acquisition on the short-term stock prices of the Indian acquiring companies. The
event study is widely used for the evaluation of mergers and acquisitions. I used this
study to evaluate whether the announcement of the merger of Indian acquiring
companies with European target firms, create any short-term gains. Also, I conducted
an empirical test to assess the significance of the abnormal trading volumes around
the date of the announcement of merger.
My study follows the research done by Malhotra and Zhu (2008), but for European
companies. Though the selection of target companies is different, the results of my
study do not differ from that of Malhotra and Zhu (2008). My study reveals that the
abnormal returns are more influenced by the price pressure effect, rather than the
information of the merger.
Most often we see, in a cross-border M&A, a company from a developed nation
acquiring a company in a developing nation. Because of this, investors in a
developing nation perceive the companies in the developed markets as more esteemed
in comparison to their own companies. When the information of an acquisition of the
esteemed foreign company hits the market, the investors have a propensity to
exaggerate the situation. These investors seldom try to see the actual value
consequences of that merger or acquisition. It is this psychological prejudice towards
58
a foreign company, which leads to an abnormal trading volume at the time of the
announcement of merger.
This finding has a huge potential for Indian managers who might just look at the
initial stock price augmentation, without realising its true source. There is a
probability, that managers may recognise this increase in price as shareholders’
approval to their actions of going global. Thus, managers should scrutinise the price
reaction more carefully in case of cross-border M&As as an extra precaution for their
future investments. From the investors’ perspective, the results of my study show that,
they need to view the cross-border M&As more logically. The common credence that
cross-border acquisitions lead to increased shareholder wealth, also needs to carefully
examined.
One vibrant feature of the results I obtained was the significance of the information of
merger ‘one day prior’ to the date of announcement. The price pressure effect is seen
only on and after the date of announcement. As mentioned in section 6.1, this gives
rise to the possibility of Insider Trading in the Indian markets. Indian markets have,
since inception, suspected the existence of insider trading activities. It was made a
punishable offence by introducing SEBI (Insider Trading Regulations), 1992 (Singh
and Chauhan, 2004). The famous case where Hindustan Lever Limited (HLL) was
asked to compensate the Unit Trust of India Rs. 30.4 million in 1997-98 shocked the
Indian investors (Jain, 2002). Gupta (2006) provided empirical evidence on the
existence of insider trading in the Indian stock markets.
59
My study provided evidence that price pressure effect does exist in cross-border
M&As. This supports the study of Mitchell, Pulvino and Stafford (2004), which
claimed that price pressure effects can pose a problem for analysing the other findings
of an event study. However, there is need for in-depth research on the behaviour of
the abnormal trading volume to generalise it to all acquiring firm’s stocks in a
developing nation. My study adds to the emerging literature on cross-border M&As in
developing nations and also to the need for advanced study in this field.
7.2 Limitations of the Study
First, the small database, of only 84 companies is not sufficient to study the impact of
the information of merger. Considering the fact that in the period of 2000-2008, India
has witnessed over 500 M&A deals, the final workable data of 84 limits the predictive
power of the study.
In my study, I have used a one-sample t–test and a Wilicoxon Signed Ranks test –
which is a non-parametric t-test. The t-test is, though effective, a very basic statistical
tool to analyse data. Use of a better statistical tool would have provided even more
robustness to the results.
My study is based on the evaluation of short-term abnormal gains earned during the
announcement of a merger or acquisition. It uses limited variables, like abnormal
returns, cumulative abnormal returns and abnormal trading volumes. It ignores the
involvement of other variables like size of the merger, industry or sector of the
merger, mode of payment, etc. in determining the returns shareholders can earn.
60
References
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46CA92A52DC7/0/India_goes_global.pdf
Andrade, G., Mitchell M. and Stafford E. (2001), New Evidence and Perspective on
Mergers, The Journal of Economic Perspectives, Vol. 15(2), pp. 103-120.
Andre P., Kooli M. and L’Her J. F. (2004), ‘The Long-Run Performance of Mergers
and Acquisitions: Evidence from the Canadian Stock Market’, Financial
Management, Vol. 33(4), pp. 27-43
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Appendix 1 - Substantial Acquisition of Shares and Takeover Code

1997
MAIN FEATURES OF THE INDIAN TAKEOVER CODE
Compulsory disclosure: - New regulation made it compulsorily to disclose holdings

at the levels of 5%. So any person whose total holding in the company (Inclusive of
shares and voting right already held) reaches to this limit has to compulsorily disclose
his level of holding to the concerned company and stock exchange.
Continual disclosures: - If a person held more than 10% shares or voting right in a
company, He has to disclose his holding within 21 days from the financial year
ending on 31st March. (Note: This limit was revised to 15% in Oct. 98)
Trigger of takeover code: - If a person wants to increase his holding beyond 10%
(this 10% would be inclusive of the rights or shares already held by the acquirer or by
the persons acting in concert with him), he has to do make an open offer.
Consolidation of holdings/Creeping Acquisition:-

If a person hold more than 10% but less than 51% shares or voting right in a company
and want to acquire more than 2% in a financial year can do only through public
offer.
(Note: In Oct. 98, 10%, 51 % and 2% limits were revised as 15%, 75 % and 5%
respectively)
Acquisition of any additional shares or voting rights when the acquirer already
Have 51 % of the shares or voting rights of the company can be done through open
offer only.
(Note: in oct.98, this limit was revised to 75 %)
Minimum number of shares to be acquired:-

The public offer made by the acquirer to the shareholders of the target company shall
be for a minimum ten per cent of the voting capital of the company.)
(Revised in Feb 98 as 20%)
Minimum Price: Minimum price to be offered to shareholders will be average of

Highest and lowest in the preceding 26 weeks.
If the public offer results in the public shareholding being reduced to 10% or less of
the voting capital of the company, or if the public offer is in respect of a company
which has public shareholding of less than 10% of the voting capital of the company,
the acquirer shall either, make an offer to buy the outstanding shares remaining with
the shareholders OR undertake to disinvest through an offer for sale or by a fresh
issue of capital to the public, which shall open within a period of 6 months from the
date of closure of the public offer, such number of shares so as to satisfy the listing
requirements
Offer conditional upon level of acceptance: - an acquirer may make an offer

conditional as to the level of acceptance which may be less than twenty per cent:
Conditional offer will be for minimum 20% percent, although Acceptance level may
be less than 20%.
Competitive bid:- Any person other than the acquirer can made a competitive offer
within 21 days of the public announcement of the offer.
75
Competitive offer shall be at least for the number of shares for which first public
announcement has been made. In case of a competitive bid, the acquirer who made
the first announcement shall have the option to revise his original offer within 14days
of such competitive offer, if no such announcement is made by acquirer within 14
days than original offer will be continue to be valid.
The acquirers who have made the public announcement of offer(s) including the
public announcement of competitive bid(s) shall have the option to make upward
revisions in his offer(s), in respect to the price and the number of shares to be
acquired, at any time up to seven working days prior to the date of closure of the
offer:
Withdrawal of Offer:-
Withdrawal of offer can be made consequent to competitive offer or under following
circumstances: - (1) the statutory approval(s) required have been refused; (2) the sole
acquirer, being a natural person, has died; (3) such circumstances as in the opinion of
the Board merits withdrawal.
Bail out takeovers: -

Separate provisions are given for substantial acquisition of shares in a financially
weak company not being a sick industrial company, in pursuance to a scheme of
rehabilitation approved by a public financial institution or a scheduled bank. The
Financial institution shall be responsible for ensuring compliance with the provisions
of this Chapter.
Exemptions from open offer: -

The public offer provisions of the Takeover Code will not be apply in the following
cases:
i) Allotment in pursuance of an application made to a public issue;
ii) Allotment pursuant to an application made by the shareholder for rights

issue, Subject to such rights issue not resulting in change in control and
management of the company;
iii) Preferential allotment of shares, subject to the condition that at least 75%
of the shareholders of the company shall have approved the preferential
allotment and that sufficient disclosures relating to the post-allotment
shareholding pattern, offer price etc., have been made to the shareholders;
iv) Allotment to the underwriters pursuant to any underwriting agreement;
v) Issue of American Depository Receipts and Global Depository Receipts or

Foreign Currency Convertible Bonds, till such time, as they are not
converted into equity shares.
vi) Shares held by banks and financial institutions by way of security against
loans
vii) in addition to the above cases, even when there is a change in control and
management of the company, the Takeover Code would still not apply if at
76
least 51% of the shareholders of the company have approved the

acquisition by the acquirer after being made aware that such acquisition
would result in change in control and management.
Preferential Offers: - Companies adopt the preferential offer route in varied

situations for the purpose of consolidation of stake by the existing Indian or foreign
promoters, induction of foreign collaborators with foreign technology, gaining
management control of the company, injection of fresh funds for turning around sick
companies., Regulations provide that the Board resolution is to be sent to the stock
exchanges, SEBI will grant exemption on case to case basis under the powers granted
to it under section 4 of the regulation .
Acquisitions during offer period : except where an offer is made conditional as to

minimum level of acceptances, the acquirer may be allowed to make acquisitions
during offer period subject to the condition that highest price paid for such acquisition
be paid to the shareholders under the public offer, unless it is less than the minimum
offer price.
77
Appendix 2 – SPSS Results for T-tests and Wilcoxon Signed-Ranks

test
Exhibit 1 – SPSS Test Results for One-Sample T-Test for Abnormal Returns
One-Sample Test
Test Value = 0
95% Confidence
Interval of the
Mean Difference
t df Sig. (2-tailed) Difference Lower Upper
D -5 .010 79 .992 .0000264 -.005042 .005095
D -4 .108 79 .915 .0003499 -.006121 .006821
D -3 .025 79 .980 .0000964 -.007659 .007852
D -2 -.287 79 .775 -.0012002 -.009525 .007124
D -1 1.674 79 .098 .0074790 -.001414 .016372
D0 2.781 79 .007 .0123135 .003501 .021126
D1 1.218 79 .227 .0057998 -.003682 .015281
D2 .536 79 .594 .0015953 -.004333 .007524
D3 -.039 79 .969 -.0001310 -.006849 .006587
D4 .107 79 .915 .0003131 -.005496 .006122
D5 1.014 79 .313 .0040178 -.003865 .011901
D6 -.226 79 .822 -.0006631 -.006503 .005177
D7 .662 79 .510 .0019935 -.003998 .007985
D8 -.420 79 .675 -.0010618 -.006092 .003968
D9 .036 79 .972 .0001047 -.005741 .005951
D 10 .128 79 .898 .0003742 -.005434 .006183
D 11 1.049 79 .297 .0028358 -.002544 .008216
D 12 .160 79 .873 .0004545 -.005205 .006114
D 13 .190 79 .850 .0006245 -.005934 .007183
D 14 .241 79 .810 .0006405 -.004657 .005938
D 15 .413 79 .681 .0010100 -.003861 .005881
D 16 .775 79 .441 .0023178 -.003638 .008273
D 17 .464 79 .644 .0013216 -.004354 .006997
D 18 -1.255 79 .213 -.0037935 -.009811 .002224
D 19 .773 79 .442 .0021824 -.003438 .007803
D 20 1.216 79 .228 .0036322 -.002316 .009580
78
Exhibit 2 – SPSS Test Results for Wilcoxon Signed-Ranks Test
Wilcoxon Signed Ranks Test
Asymp. Sig.
Z (2-tailed)
D -5 - Mean -0.047963 0.9617458
D -4 - Mean -0.681074 0.4958248
D -3 - Mean -0.004796 0.9961731
D -2 - Mean -0.100722 0.919771
D -1 - Mean -1.424499 0.154302
D 0 - Mean -2.844202 0.0044523
D 1 - Mean -1.386129 0.1657075
D 2 - Mean -0.700259 0.4837656
D 3 - Mean -0.378907 0.7047568
D 4 - Mean -0.158278 0.874238
D 5 - Mean -0.004796 0.9961731
D 6 - Mean -0.551574 0.5812404
D 7 - Mean -0.565963 0.5714191
D 8 - Mean -0.796185 0.4259246
D 9 - Mean -0.311759 0.7552236
D 10 - Mean -0.191852 0.8478583
D 11 - Mean -0.441259 0.6590255
D 12 - Mean -0.16787 0.8666853
D 13 - Mean -0.498815 0.61791
D 14 - Mean -0.153481 0.8780186
D 15 - Mean -0.158278 0.874238
D 16 - Mean -0.868129 0.3853236
D 17 - Mean -0.235018 0.8141944
D 18 - Mean -0.786592 0.4315206
D 19 - Mean -0.139093 0.889377
D 20 - Mean -1.227851 0.2195028
79
Exhibit 3 – SPSS test Results for Cumulative Abnormal Returns
One-Sample Test
Test Value = 0
95% Confidence
Interval of the
Mean Difference
CAR(-1, +1) 3.300 2 .081 .01762131 -.005356 .04059909
CAR(-2, +2) 2.798 4 .049 .01481006 .00011632 .02950381
CAR(-5, +5) 3.703 10 .004 .01462919 .00582545 .02343292
CAR(-5, +20) 9.934 25 .000 .02660903 .02109233 .03212574
80
Exhibit 4 – SPSS Test Results for Abnormal Trading Volume
One-Sample Test
Test Value = -0.0064777

95% Confidence
Interval of the
Mean Difference
D -5 1.477 79 .144 .4214932 -.146652 .989638
D -4 1.370 79 .175 1.2340269 -.558601 3.026655
D -3 1.192 79 .237 1.9071310 -1.276922 5.091184
D -2 1.188 79 .239 1.2896534 -.871895 3.451201
D -1 1.529 79 .130 .8069733 -.243709 1.857655
D0 3.205 79 .002 1.9337370 .732897 3.134577
D1 3.661 79 .000 1.3205176 .602653 2.038382
D2 1.745 79 .085 1.2546907 -.176305 2.685686
D3 1.533 79 .129 .5489559 -.163686 1.261598
D4 2.126 79 .037 .6817250 .043322 1.320128
D5 2.245 79 .028 .5250038 .059583 .990425
D6 1.876 79 .064 .6078283 -.037243 1.252899
D7 1.805 79 .075 .5005016 -.051305 1.052308
D8 1.498 79 .138 .9080796 -.298291 2.114450
D9 1.139 79 .258 .1605456 -.119900 .440991
D 10 1.095 79 .277 .2222903 -.181857 .626438
D 11 .856 79 .394 .1639020 -.217094 .544898
D 12 .308 79 .759 .0652949 -.356657 .487247
D 13 1.041 79 .301 .3079849 -.280874 .896844
D 14 .971 79 .334 .6177404 -.648082 1.883563
D 15 .807 79 .422 .2664141 -.391019 .923847
D 16 1.215 79 .228 .6731918 -.429537 1.775921
D 17 1.281 79 .204 .5891664 -.326582 1.504915
D 18 .885 79 .379 .5710562 -.713117 1.855230
D 19 .866 79 .389 .3032272 -.393374 .999828
D 20 .949 79 .346 .3738975 -.410699 1.158494
81

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Announcement Effect of Cross-Border M&As on Indian Acquiring Firms

Announcement Effect of Cross-Border

M&As on Indian Acquiring Firms

A Dissertation submitted in part consideration for the

degree of MA in Finance and Investment

I would like to express my sincere gratitude and thanks to my supervisor, Professor

this research study.

have worked on in this dissertation

who helped me in every way possible and stood by me in troubled times.

Whenever there is an announcement about a merger, especially a cross-border merger,

there is an excitement and expectation among the shareholders of the acquiring

cross-border M&As in India makes my study an interesting addition to the existing

effect and not the announcement effect.

Table of Contents ………………………………………. …... iii

List of Tables and Figures ………………………………….. v

1.1 Background ……………………………………………………… 1

1.2 Objective of My Study ………………………………………….. 2

1.3 Structure of the Dissertation …………………………………….. 3

2 Mergers & Acquisitions in India …………………………… 6

2.1 Growth in Indian M&A …………………………………………. 6

2.2 Liberalisation as a Boost ………………………………………… 9

3 Literature Review …………………………………………... 11

3.1 What are Mergers and Acquisitions? ……………………………. 11

3.2 Types of Mergers ………………………………………………… 13

3.3 Cross-Border M&As …………………………………………….. 15

3.3.1 Historical Rise in Cross-Border M&As …………………. 16

3.3.2 Recent Downturn ………………………………………... 17

3.3.3 Characteristics of Cross-Border M&As …………………. 18

3.4 Motives for Cross-Border M&As ……………………………….. 20

3.5 Performance of Cross-Border M&As …………………………… 23

4 Measures of Performance of Cross-Border M&As ………. 30

4.1 Evaluating Performance by Accounting Studies ………………... 30

4.2 Evaluating Performance by Event Studies ………………………. 31

4.3 Evaluating Performance by Survey of Executives ……………… 34

4.4 Evaluating Performance by Clinical Study ……………………... 35

5 Empirical Study: Data and Methodology …………………. 37

5.1 Data ……………………………………………………………… 37

5.2 Methodology …………………………………………………….. 41

5.2.1 Calculation of Abnormal Returns ……………………….. 42

5.2.2 Statistical Tests for Abnormal Returns ………………….. 44

5.2.3 Calculations of Cumulative Abnormal Returns …………. 45

5.2.4 Price Pressure Hypothesis ……………………………….. 46

6 Results and Analysis ……………………………………….. 49

6.1 Abnormal Return Analysis …………………………………….... 49

6.2 Cumulative Abnormal Return Analysis ………………………… 53

6.3 Abnormal Trading Volume Analysis …………………………… 54

7 Conclusion and Limitations ………………………………... 58

7.1 Conclusion ………………………………………………………. 58

7.2 Limitations of the Study ………………………………………… 60

List of Tables and Figures

Table 2.1 Cross-Border Mergers and Acquisitions: India …………………. 7

Table 2.2 Top 10 Foreign Acquisitions by Indian Firms …………………... 8

Table 3.1 Cross-border M&A investments

(% of FDI inflows to the host countries) ………………………… 16

Table 3.2 FDI Inflows in India from 2000 – 2007 …………………………. 17

Table 3.3 Global Strategy: An Organizing Framework ……………………. 22

Table 6.1 Average Abnormal Return of Acquiring Firm’s Stock and

Test Results ……………………………………………………… 50

Table 6.2 Cumulative Abnormal Returns and Test Results ……………….. 54

Table 6.3 Abnormal Trading Volume and Test Results …………………… 56

Figure 2.1 Geographical Distribution of Indian Cross-Border M&As from

Figure 3.1 Global Cross-Border M&As, Value and Growth Rate,