Mergers and acquisitions: motives and market response

Abstract

The project is a two part study, where in the first part of the study involves study of Empirical and theoretical literature on merger motives. This was followed by study of cases of mergers and acquisitions in India in the later half if the eighties. The cases have been categorized on the basis of merger motives of the acquiring company and the target, and, the basic strategy of the merger/ takeover. This also provides a groundwork for developing a conceptual framework for the analysis of the merger and acquisitions in India. Based on our analysis of this classification and other secondary literature we concluded that, (i) ‘Synergy turns out to be a predominant, though implicit rather than explicitly stated motive. (ii) The financial institutions which are increasingly into the limelight because of their majority shareholding are now adopting a more benign stance towards majority non FI shareholding as evidenced in certain cases.(iii) In contrast to the early 70’s, the hostile takeover’s have acquired increasing occurrence in the M&A activity.(iv) The legal & regulatory framework for M&A activity, though gearing up, is still marred with significant deficiencies. (v) The Indian conglomerate mergers, especially those entered into by the established Business Houses rather than being guided by strategic direction ( as opposed to the theoretical literature ), are more of random walk & an Exploitation of an investment opportunity. The second part of the study involves the study of the market response to the merger announcements. The case of Reliance Industries Ltd – Reliance petrochemicals Ltd. Merger and the takeover of Consolidated coffee Ltd. By the Tata Tea Ltd. Have been analyzed using the event study approach. Specifically two hypotheses have been tested: (i) The Perfectly Competitive Acquisitions Market Hypothesis which implies that for an acquiring firm there are no monopolistic gains due solely to the merging as a way of obtaining productive capacity.(ii)The Efficient Capital Market Hypothesis which implies that the stock prices adjust to new information instantaneously. While the first hypothesis has support and cannot be rejected with any degree of significance, the second hypothesis has some support from the TTL – CCL case. In case of RIL – RPL case the problem of leakage of information, making the event date uncertain, has made it difficult to draw conclusive results. The limitations of the study include lack of adequate number of data points for the application of the market model, small size of sample and use of the market index only for projection due to non-availability of the daily industry indices.