The Impact of Domestic Mergers and Acquisitions on Acquirer Shareholders’ Wealth in India
This paper examines the share price performance of domestic mergers and acquisitions in India during the period 2003–2008. The focus of the paper is on the shareholders of acquiring firms. The present work performs a disaggregated analysis for sub-samples based on the status of the target firm acquired. The sample is divided into two categories: (i) acquisition of target firm to be totally absorbed with the acquiring firm (ii) target firm remains as subsidiary (51–100 %). The study further investigates the effect of method of financing (cash or stock) employed in the acquisition and the form of the target firm (listed or unlisted) acquired on the stock returns of the acquiring companies’ shareholders. The results indicate that acquisitions generate 1.60 % (statistically significant) cumulative average abnormal returns (CAAR) during the event window of 5 days (−2, +2) for the entire sample. The major finding of disaggregated analysis is that when target remains as a domestic subsidiary, the acquirer earns 2.82 % CAAR (statistically significant) over pre-event window of 19 days (−20, −2). In contrast, the acquirer shareholder loses 0.41 % CAAR when the target firm is absorbed with the acquiring firm during the same period. The acquisitions financed with cash generate positive abnormal returns. The positive abnormal returns are not observed in the case of acquisitions financed with stock. The acquirer of unlisted domestic target firms experience higher return than the acquirers of listed domestic target firms. However, the acquirers experience (statistically significant) negative abnormal returns for the post-event window of 19 days (+2, +20) in all acquisitions.
KeywordsShareholders Short-run performance India Event study Cumulative abnormal return Shareholders wealth effect Domestic acquisitions
- Asquith, P., Bruner, R., & Mullins, D, Jr. (1987). Merger returns and the form of financing. Proceedings of the Seminar on the Analysis of Security Prices, 34(1), 115–146.Google Scholar
- Beena, P. L. (2000) An analysis of mergers in private corporate sector in India, Working Paper No. 301-2000. Center for Development Studies, Thiruvananthapuram, Kerala, India, http://www.cds.edu.
- Bruner, R. F. (2002). Does M&A pay? A survey of evidence for the decision maker. Journal of Applied Finance, 12 (Spring/Summer), 48–68.Google Scholar
- Cowan, A. R. (2007). Eventus 8.0 users guide, standard edition 2.1. Ames Lowa: Cowan Research LC.Google Scholar
- Jarrell, G. A., & Poulsen, B. A. (1989). The returns to acquiring firms in tender offers: Evidence from three decades. Financial Management, 18(3), 12–19.Google Scholar
- Jensen, M. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–329.Google Scholar
- Kiymaz, H. (2003). Wealth effect for US acquirers from foreign direct investments. Journal of Business Strategies, 20(1), 7–21.Google Scholar
- Mann, B. S., & Kohli, R. (2009). Impact of mode of payment and insider ownership on target and acquirer’s announcement returns in India. Vikalpa, 34(4), 51–66.Google Scholar
- Masse, I., Hanrahan, R., & Kushner, J. (1990). The effect of the method of payment on stock returns in Canadian tender offers and merger proposals for both target and bidding firms. Quarterly Journal of Business and Economics, 29(4), 102–124.Google Scholar
- Mittal, A., & Jain, P. K. (2012). Mergers and acquisitions performance system: integrated framework for strategy formulation and execution using flexible strategy game-card. Global Journal of Flexible Systems Management. doi:10.1007/s40171-012-0004-7.
- Moeller, S. B., & Schlingemann, F. P. (2005). Global diversification and bidder gains: A comparison between cross-border and domestic acquisitions. Journal of Banking & Finance, 29(3), 533–564.Google Scholar
- Pettway, R. H., Sicherman, N. W., & Yamada, T. (1990). Japanese mergers: relative size, corporate collectivism and shareholder wealth. In Rhee, S. G., & Chang, R. P. (Eds.), Pacific-Basin capital markets research (Vol. 1, pp. 181–202). Amsterdam: Elsevier.Google Scholar
- Rani, N., Yadav, S. S., & Jain P. K.(2010). Corporate merger practices in India: An empirical study. In Proceedings of tenth global conference on flexible systems management GLOGIFT10, graduate school of system design and management collaboration complex. Japan: Hiyoshi Campus, Keio University.Google Scholar
- Rappaport, A., & Sirower, M. (1999). Stock or Cash? The trade-offs for buyers and sellers in mergers and acquisitions. Harvard Business Review, 77(6), 147–158.Google Scholar
- Sushil. (2009). The dual perspective of performance. Global Journal of Flexible Systems Management, 10(4), iii.Google Scholar
- Sushil. (2010). Flexible strategy game-card. Global Journal of Flexible Systems Management, 11(1/2), 2 (Editorial).Google Scholar
- Weston, J. F., & Weaver, S. C. (2001). Mergers and acquisitions. New York: McGraw-Hill.Google Scholar