20-09-2014, 03:16 PM
Do Indian Acquirers Create Shareholder Value
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ABSTRACT
This paper empirically examines whether the Indian acquirers create value to their
shareholders around the time of announcement and the effect of family business groups in
value creation for shareholders of the acquirers. We measure the value creation for the
shareholders of acquirers by the market reaction surrounding the announcement date of
acquisition. One of the unique characteristics of many Indian firms is their affiliation to a
family business group. The literature suggests that the family business group firms are
different from other firms which are not part of any family business group. Keeping in mind
these differences, we investigate mergers and acquisitions phenomena between the family
business group acquirers and other acquirers. More specifically we investigate the effect of
family business groups in value creation/destruction by the acquirers.
Using SDC Platinum mergers and acquisitions data for the period of 1994 to 2009, we find
that the Indian acquirers create value for their shareholders at the time of announcement as
opposed to the findings from the developed markets. With the initial data analysis we also
find that the Indian acquirers affiliated to a family business group create less shareholder
value as compared to non-group Indian acquirers although business group acquirers create
positive shareholder value.
DO INDIAN ACQUIRERS CREATE SHAREHOLDER VALUE
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conclude that the mergers seem to create value but the value is accrued entirely to target firms
and the acquirers either destroy value or they do not create any value. Andrade et al (2001)
also find the support for positive abnormal returns to target while negative but not significant
stock returns to acquirers.
Some recent studies (Shleifer and Vishny, 2003; Rhodes-Kropf & Viswanathan, 2004; Dong
et al, 2006) followed the market valuation approach to answer some of the empirical findings
in merger and acquisition. They argue that mergers are driven by the valuation in the market.
Moeller et al (2004) study the effect of firm size on the value from acquisitions. They
conclude that the negative abnormal return surrounding the announcement date is only
applicable for large acquirers; the smaller acquirers tend to gain in acquisitions.
The studies mentioned above have looked into short-run value creation/destruction in
acquisitions. There are some studies (Langetieg, 1978; Asquith, 1983; Mandelker, 1974;
Malatesta, 1983) which have also looked into long-run performance of the acquirers. These
studies found that the acquirers experience significantly negative abnormal returns over one
to three years after the merger. At the same time there are few studies which did not found
the significant negative abnormal returns over long-run. Langetieg (1978) found that there is
no significance negative abnormal return for long term event window after adjusting for
industry. Mandelker (1974), Malatesta (1983), and Franks et al (1991) also did not find the
significant abnormal returns over long-run.
Agrawal et al (1992) concludes that the shareholders of acquiring firms lose about 10% over
the five-year post-merger period. Their results are robust with various specifications. Some
more recent studies on long-run value creation by the acquirers have also find the negative
abnormal returns for the acquirers (Andrade et al, 2001; Fuller et al, 2002; and Moeller et al,
2005).
Conclusion
This paper studies the wealth effect of corporate acquisition and the effect of business group
affiliation on the value creation at the time of an acquisition announcement. Using 707
acquisitions data from SDC Platinum database for the period of 1994 to 2009 I found
evidence that the market reaction to acquirers at the time of acquisitions is positive and
significant and market discounts the acquisitions made by business group firms as compared
to non-group firms. The results show that the Indian acquirers create value even after
changing the event window period from 3 days to 5 days and 11 days. These results are
contrary to the findings about wealth effect on acquisition in the developed markets. The
acquirers which are affiliated to a business group create less value for their shareholders as
compared to the acquirers which are not affiliated to business group although business group
affiliated acquirers are also creating significant positive value for their shareholders.
One of the limitations of this study is that there are some discrepancies in the dataset but
there is no other way to carry out the study and to get some insight about Indian mergers and
acquisitions. Other limitation includes the skewed dataset. In spite of these limitations this
study is based on more detailed analysis for Indian acquisitions and shows some interesting
results. To explore the determinants of business group affiliated firms and the characteristics
of these firms which lead to this discount in the value creation for group affiliated firms
remains future area of work.