Business groups, governance, institutional frameworks and cultures: Indian mergers and acquisitions.

Tawani, V 2017, Business groups, governance, institutional frameworks and cultures: Indian mergers and acquisitions., Doctor of Philosophy (PhD), Economics, Finance and Marketing, RMIT University.

Document type: Thesis
Collection: Theses

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Title Business groups, governance, institutional frameworks and cultures: Indian mergers and acquisitions.
Author(s) Tawani, V
Year 2017
Abstract The global business environment is defined by its compete-or-perish nature. To survive, businesses must continually undertake both organic and inorganic corporate restructuring activities. Amongst the inorganic options, Mergers and Acquisitions (M&As) are a very attractive strategy for managers. When implemented successfully, M&As may enable rapid forays into new territories, the benefits of diversification, economies of scale, operating and financial synergies, better efficiencies, industrial supremacy, tax advantages and several more rewards. However, when they fail, M&As destroy the value of the participating firms. This failure can be caused by diseconomies of scale, lack of synergy, cultural conflicts, negotiation disputes, integration issues, agency issues, the hubris effect, and so on. Given the numerous advantages of M&As, it is not surprising that managers show an urge to merge. However, a wrong venture can wipe out millions of dollars of shareholders wealth. Nonetheless, global business history is replete with M&As debacles. Thus, the implementation of M&As is a debatable strategy that needs careful evaluation.

The finance literature about M&As in the developed world is abundant. However, the emerging markets are not so well understood. While the emerging markets are relatively newer players, they are continuously gaining prominence on the global business landscape. The finance literature argues that Emerging Market Multinational Enterprises (EMNEs) are fundamentally different, in terms of their characteristics, from their counterparts in developed countries. In terms of globalization, as late comers, EMNEs have lagged behind, making their inspirations, intentions and implementation techniques quite unique. Further, emerging markets are typically characterized by weaker legal systems, with the legal firms controlled and managed by large business groups that own majority stakes in the firms. As a consequence, outside shareholders are minority shareholders, and in the context of classical agency theory, the principal and the agents are same identities. This implies a convergence of ownership and control. Thus, minority shareholders face the risk of expropriation of wealth at the hands of majority shareholders (horizontal agency issue), and the weaker legal systems constrain them in controlling the errant managers. Conceivably, announcing M&As in such a setting is poised to yield unique share market responses. Thus, our current understanding of M&As in the developed world has limited relevance to emerging markets.

India is one of the fastest growing economies in the world, and a member of the BRICS (Brazil, Russia, India, China and South Africa) countries, which are projected to be the most dominant economies by 2050. In the last 25 years, India has undergone a series of economic reforms which has catapulted its status from a dormant state to one of the key players shaping up the new globalized economy. The current Indian Prime Minister, Mr Narendra Modi, is one of the most influential statesmen worldwide and is known for carrying out bold policies in a democracy that accounts for a sixth of the world’s population. In fact, the press is already debating about the long-term potential that India has to become a new economic superpower.

This thesis highlights several conflicting and intriguingly perplexing attributes about India that make it a unique country amongst other emerging markets, thus necessitating research focussed on India. This thesis develops a comprehensive framework which projects India as a common-law country with business structures and corporate governance models resembling civil-law countries, yet is distant from either of the two with respect to its socio-cultural anthropological attributes. By defying existing principle theories in finance literature on various dimensions characteristically, India thus portrays a contradictory and captivatingly puzzling image. Therefore, to gain deeper insights, this thesis tests a set of hypotheses focusing on the impact of the factors like ownership stake, cultural proximity, related institutional frameworks, comparable corporate governance models, and economic distances on the returns obtained by the Indian shareholders.

In essence, this thesis mainly focuses on the following set of questions:

(i) How do the Indian target and acquirer shareholders fare on the announcement of M&As, both domestic and cross-border?

(ii) Is there a difference in return from domestic and cross-border M&As for the shareholders?

(iii) Is there any ownership effect on the returns to the shareholders in domestic M&As?

(iv) Is there any cultural effect on the returns to the shareholders in cross-border M&As?

(v) Is there any institutional effect on the returns to the shareholders in cross-border M&As?

(vi) Is there any corporate governance effect on the returns to the shareholders in cross-border M&As?

(vii) Is there any economic distance effect on the returns to the shareholders in cross-border M&As?

The methodology employed is a two-stage analysis. The first stage includes an event study, which aims to determine abnormal returns associated with announcements of M&As to the Indian shareholders affected by the deal.

The second stage is a cross-sectional analysis, which aims to identify the factors that may explain the sources of abnormal returns obtained by these shareholders. The two financial models—Market and three factor Fama-French—are used to calculate the abnormal returns for the event study. These abnormal returns are determined by using the Ordinary Least Squares (OLS) and robust regression techniques. The robust regression method in the event study is the methodological contribution of this thesis to the literature. The contemporary discussions about event study methodology in statistical papers suggest that the robust regression method is more reliable in capturing announcement effects. For the cross-sectional analysis, the key factors identified in the literature are regressed with the cumulative average abnormal returns to identify those that determine the source of the returns.

The data for the analysis covers the M&A deals from 1989 to 2013. In total, 407 deals are shortlisted, with the analysis based on 308 target firms and 355 acquirer firms. The emerging market literature often sights data limitations, and thus the analysis is confined to the scope of the data. The methodologically induced filtering process of excluding deals with the confounding effects and insufficient trading data, along with the missing firms, narrowed the sample size for some sub-sets. For example, of the original 50 cross-border deals by Indian acquirers, there are 38 left in the clean sample. The phenomenon of missing firms is a known issue in the Indian markets and is well documented. Likewise, even the relevant accounting data to perform a pair-wise relative analysis of the target and acquiring firms is missing for a significant proportion of the dataset. Finally, this thesis focuses on the successful deals between the listed firms. The unsuccessful, pending, rumoured, withdrawn deals along with the deals involving private firms on either side are not incorporated.

The results indicate that:

(i) Both the target and acquiring shareholders make positive abnormal returns on the announcement of M&As.

(ii) Domestic deals produce higher returns for the shareholders than cross-border deals.

(iii) The deals in which acquirers take a significant stake (>50%) are favoured more by the sharemarket. There is also an indication that the large business groups do not indulge in tunnelling of wealth, and intra-group M&As yield higher returns to the acquirers and lower to the targets.

(iv) Cultural proximity has no effect in determining the returns to the shareholders. Instead, distant cultures produce economically larger returns.

(v) Similarity in institutions does not dictate the outcomes of M&As.

(vi) The corporate governance model seems to be the most important source of returns to the shareholders in cross-border deals. It appears there is a preference for a corporate governance model that encourages the owners to take a majority stake in the firm. Given the weaker legal environment, the minority shareholders perceive majority stake as a commitment from the management to perform well and thus align managers with their interest.

(vii) The economic distance is an important factor when selecting the target firm in the cross-border deals. The higher the economic distance, more advance is the target nation, and thus the higher returns to the Indian acquirers.

Overall, as both the target and acquiring shareholders yield positive announcement returns, M&As appear to be a wealth enhancement strategy in the Indian markets. Also, there is a distinct preference for corporate practices that encourage concentrated ownership by the acquirers, as this enhances investor protection in a weaker legal environment by reducing horizontal agency issues between minority and majority shareholders.

Degree Doctor of Philosophy (PhD)
Institution RMIT University
School, Department or Centre Economics, Finance and Marketing
Subjects Financial Econometrics
Corporate Governance and Stakeholder Engagement
Keyword(s) Business Groups and M&As
Governance and M&As
Emerging Markets
Indian M&As
Culture and M&As
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Created: Fri, 04 Aug 2017, 09:14:55 EST by Denise Paciocco
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