A. Sandeep, Group Editorial Director, Business & Economy, presents a quantitative study on acquisitions by Indian companies involving both Indian and Foreign targets. Do such acquisitions destroy value (as has been commonly reported by scholars and researchers in the past)? And do market sentiments alone influence the change in market value of buyers, thereby negating the effect of the very acquisitions?
Globally, the outcomes of mergers and acquisitions (M&As) have been analysed at length. However in the Indian context, due to factors such as lack of data availability in the public domain, lack of transparency in deals et al, such studies have been rare. More so, studies discussing the outcomes of acquisitions by Indian companies alone have been the rarest. We developed a methodology to collect and analyse data on acquisitions by Indian companies. We had two scenarios: (a) Indian companies buying Indian targets (referred hereon to as India-India); and (b) Indian companies buying Foreign targets (referred hereon to as India-Foreign). The performance of each acquirer on a certain parameter (market capitalisation) was tracked down and mapped during the pre and post-deal periods. Our final conclusions were arrived at by studying 167 deals involving Indian firms as acquirers. We focused on the importance of using m-cap as a performance indicator. Critically, checks were introduced on whether statistical significance differences exists between the changes in m-cap of acquirers and changes in the standard index (BSE Sensex) under various control environments (like Sensex and non-Sensex acquirers, various time windows et al).
The results we observed turned out to be quite opposite of what studies on acquisition globally have stated – that acquisitions erode wealth for the acquirers’ shareholders. The mirage of synergy playing a role in destroying hopes of acquirers’ shareholders to gain wealth have been identified and proven by a number of academic scholars, consultants and research firms. Most of them use changes in financial metrics (like market capitalisation) to arrive at a conclusion. In the NBER Working Paper titled, ‘Do Shareholders of acquiring firms gain from acquisitions? (2003)’, scholars Sara B. Moeller (Cox School of Business, Southern Methodist University), Frederik P. Schlingemann (Katz Graduate School of Business, University of Pittsburgh) and René M. Stulz (Fisher College of Business, Ohio State University), state, “We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. Shareholders of these firms lost a total of $218 billion when acquisitions were announced. Though shareholders lose throughout our sample period, losses associated with acquisition announcements after 1997 are dramatic.” In another study for The ESRC Centre for Business Research, University of Cambridge, titled, ‘Do takeovers create value? (2002)’, researchers Magnus Bild, Mikael Runsten (Stockholm School of Economics) and Paul Guest and Andy Gosh (Centre for Business Research, Cambridge University Judge Institute of Management), report that, “on average, acquisitions destroy roughly 30% of the acquirer’s pre-acquisition value.” According to James Heskett, Baker Foundation Professor, Emeritus, at Harvard Business School, “Acquirers often end up bargaining for a seat on the loser’s bench.” In his paper titled, ‘Should We Brace Ourselves for Another Era of M&A Value Destruction? (2004)’, he sums up thus, “Research tells us that the short-term value in an acquisition accrues primarily to shareholders of acquired companies. On the other hand, short-term value is more often destroyed than created for shareholders of acquiring organisations. As many as two-thirds of all acquirers fail to achieve the benefits planned at the outset of an acquisition. In the end, M&A is about buying more volume. It is a flawed process, invented by brokers, lawyers, and super-sized, ego-based CEOs. Acquisitions are a macho exercise, not an intellectual one. Think World Wrestling Federation, not a chess tournament.”
Globally, the outcomes of mergers and acquisitions (M&As) have been analysed at length. However in the Indian context, due to factors such as lack of data availability in the public domain, lack of transparency in deals et al, such studies have been rare. More so, studies discussing the outcomes of acquisitions by Indian companies alone have been the rarest. We developed a methodology to collect and analyse data on acquisitions by Indian companies. We had two scenarios: (a) Indian companies buying Indian targets (referred hereon to as India-India); and (b) Indian companies buying Foreign targets (referred hereon to as India-Foreign). The performance of each acquirer on a certain parameter (market capitalisation) was tracked down and mapped during the pre and post-deal periods. Our final conclusions were arrived at by studying 167 deals involving Indian firms as acquirers. We focused on the importance of using m-cap as a performance indicator. Critically, checks were introduced on whether statistical significance differences exists between the changes in m-cap of acquirers and changes in the standard index (BSE Sensex) under various control environments (like Sensex and non-Sensex acquirers, various time windows et al).
The results we observed turned out to be quite opposite of what studies on acquisition globally have stated – that acquisitions erode wealth for the acquirers’ shareholders. The mirage of synergy playing a role in destroying hopes of acquirers’ shareholders to gain wealth have been identified and proven by a number of academic scholars, consultants and research firms. Most of them use changes in financial metrics (like market capitalisation) to arrive at a conclusion. In the NBER Working Paper titled, ‘Do Shareholders of acquiring firms gain from acquisitions? (2003)’, scholars Sara B. Moeller (Cox School of Business, Southern Methodist University), Frederik P. Schlingemann (Katz Graduate School of Business, University of Pittsburgh) and René M. Stulz (Fisher College of Business, Ohio State University), state, “We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. Shareholders of these firms lost a total of $218 billion when acquisitions were announced. Though shareholders lose throughout our sample period, losses associated with acquisition announcements after 1997 are dramatic.” In another study for The ESRC Centre for Business Research, University of Cambridge, titled, ‘Do takeovers create value? (2002)’, researchers Magnus Bild, Mikael Runsten (Stockholm School of Economics) and Paul Guest and Andy Gosh (Centre for Business Research, Cambridge University Judge Institute of Management), report that, “on average, acquisitions destroy roughly 30% of the acquirer’s pre-acquisition value.” According to James Heskett, Baker Foundation Professor, Emeritus, at Harvard Business School, “Acquirers often end up bargaining for a seat on the loser’s bench.” In his paper titled, ‘Should We Brace Ourselves for Another Era of M&A Value Destruction? (2004)’, he sums up thus, “Research tells us that the short-term value in an acquisition accrues primarily to shareholders of acquired companies. On the other hand, short-term value is more often destroyed than created for shareholders of acquiring organisations. As many as two-thirds of all acquirers fail to achieve the benefits planned at the outset of an acquisition. In the end, M&A is about buying more volume. It is a flawed process, invented by brokers, lawyers, and super-sized, ego-based CEOs. Acquisitions are a macho exercise, not an intellectual one. Think World Wrestling Federation, not a chess tournament.”
For More IIPM Info, Visit below mentioned IIPM articles
Professor Arindam Chaudhuri – A Man For The Society….
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
| ExecutiveMBA |
