06-12-2012, 11:39 AM
Motives for Mergers and Takeovers in the Indian Mutual Fund Industry
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ExecutiveSummary
The Indian industry has seen a phenomenal consolidation through a spate of mergers
and takeovers during the last decade. The mutual fund industry in India is no exception.
It therefore becomes very important to understand the motives of mergers and
takeovers in the Indian mutual fund industry. However, there is a significant difference
between a corporate merger and the merger of a mutual fund. The present study uses
various motives (variables) of corporate mergers and takeovers that fit in case of motives
for mergers and takeovers of mutual fund schemes. As far as India is concerned,
this is the first study of its kind; even in the international arena, limited research is
available in this area. A two-stage multivariate procedure is used to identify the important
factors that drive the merger of a mutual fund scheme from the viewpoint of an
acquirer.
CORPORATE MERGER/TAKEOVER VS. MERGER/
TAKEOVER OF A MUTUAL FUND SCHEME
A merger of a mutual fund refers to the transfer of net
assets of the target fund in favour of the acquiring fund
in exchange of shareholding in equal proportion of the
acquiring fund (Ding, 2006). Mergers and takeovers in
the Indian mutual fund industry can take three forms.
In the first instance, mergers and takeovers take place
between Asset Management Companies (AMCs)
wherein two AMCs merge with one another and the
merged AMC handles each scheme separately. The second
form could be a merger and takeover of schemes
whereby individual schemes are takeover by another
AMC. Lastly, a merger or a takeover can take place by
affecting “Changes in the Trust” by changing the AMC
and handing it over to new fund managers.
The first two forms of mergers and takeovers have occurred
in India but the third form related to changes in
the trust has never happened in the Indian mutual fund
industry. The present study only looks at the second
form of scheme mergers and takeovers in India due to
non-availability of data required to examine the other
two forms. The merger or the takeover activity has to
confirm to SEBI (Mutual Funds) Regulations, 1996.
LITERATURE SURVEY
Extensive research has thrown light on various theories
and motives of mutual fund mergers. Sirri and Tufano
(1998) is the first to identify the three major determinants
that affect the cost of a fund and asset flows such
as the size of a fund, its marketing and distribution expenses,
and its awareness through media. They find that
a large fund in terms of asset flows would be a more
recognized brand and would involve less search costs
as compared to small-sized funds. Further, Lunde,
Timmermann and Blake (1999) investigate the various
reasons affecting the closure of a mutual fund such as
survivorship bias, length of the life span of a fund and
the level of past returns of a fund. They believe that few
funds have a short closure period because the unit holders
are well informed about the fund’s performance. On
the other hand, some funds enjoy a long closure period
because either the unit holders take time to understand
the weak performance of the fund or they give time to
that fund to improve its performance over a period of
time. They point out that the past returns of the fund is
a prominent factor determining its performance and its
probability of closure.
DATA AND RESEARCH METHODOLOGY
Data and Sample Selection
The information on the mutual fund schemes that underwent
a merger or a takeover during the period January
1, 2000 to December 31, 2007 was taken from the
website of Association of Mutual Funds in India (AMFI),
Value Research Online database, and various online
newspaper articles. The initial sample comprised 80
mergers and takeovers of open-ended schemes3. The
fund managers of the acquiring schemes were mailed a
questionnaire regarding the motives behind mergers and
takeovers of mutual fund schemes. Out of 80 fund managers,
12 could not be contacted because of their nonworking
e-mail-ids and their cross-border jobs. Also, 3
fund managers expressed their inability to fill in the
questionnaire due to paucity of time.
Description of Statements
This section gives the justification for various variables
that fit in case of motives for mergers and takeovers of
mutual fund schemes and that are used in the present
study.
The first motive in the questionnaire relates to the replacement
of inefficient managers of the target schemes.
Grinblatt, Titman and Wermers (1995), find that replacement
of poorly performing fund management is important
in order to enhance the shareholders’ wealth.
Therefore, replacement of inefficient managers becomes
the first variable for our study.
The second motive is regarding the protection and increase
in the market share and market power.
Jayaraman, Khorana and Nelling (2002) and Zhao (2004)
also point out that across-family mergers of mutual
funds take place with an intention to increase their market
share.
RESULTS
The inputs of the 65 fund managers taken from the questionnaire
are first put to a reliability test. Cronbach’s
Alpha is used in the present study to check the internal
consistency and reliability of the data. The alpha so computed
basically measures the average correlation among
the observed variables. When the data items are not
measured at all and there is only an error component,
then the alpha is equal to zero. On the other hand, when
all the items are measured and there is no error component,
then the alpha value is equal to one. The present
study has an alpha of 0.7. Field (2005) reports that the
cut-off range of Cronbach’s alpha is 0.7-0.8. This indicates
that these variables can combine together to produce
the broad factors. Hence, our study shows a reliable
data set. Further, an exploratory factor analysis is carried
on the data set. This is a technique of data reduction
whereby the main factors are extracted that explains
the correlation among the observed variables.
CONCLUSION
Research in the field of mergers and takeovers of mutual
funds has not received much attention though phenomenal
work exists for their corporate counterparts.
The present study is the first of its kind for the Indian
mutual fund industry and thus attempts to fill the existing
research void. The study investigates the motives
behind mergers and takeovers of mutual fund schemes.
A survey of 65 fund managers is conducted whose inputs
are put to a two-stage technique of factor analysis
and regression analysis. The results of factor analysis
produce six broad factors, viz., attractive price, fund
governance, expansion of marketing and management
capabilities, expansion of asset size, benefits of diversification,
and increase in the market share. These six factors
are then subjected to multiple regression with
increase in the market share as the dependent variable.
The results of regression show that three out of the five
factors tested are significant.