Saturday, August 25, 2012

THEORY ‘I’ OF M&AS

This study was undertaken purely to analyse the changes in market capitalization, revenues and net profits of Indian companies acquiring other Indian companies/foreign companies. The results went against all known research till date and were more eye opening than we could ever imagine... or you could!

And not just globally, this hypothesis seemed to hold true on the Indian terrain as well. Notably, the February 2008 paper by Sumon Kumar Bhaumik and Ekta Selarka (William Davidson Institute), titled Impact of M&As on firm performance in India: Implications for concentration of ownership and insider entrenchment, proved that “during the 1995-2002 period, M&As in India led to a deterioration in the firm’s performance.” They also found that neither the investors in the equity market nor the debt holders “can be relied upon to discipline the errant management.” K. Ramakrishnan, in his report M&As in India: The long term post-merger performance of firms and the strategic factors leading to M&A success, after studying 87 pairs of merged firms between 1996 till 2002, concluded that “as far as wealth gains on merger announcement are concerned, only the shareholders of the acquired firms appear to be enjoying significant positive share price returns of 11.6%. The shareholders of the acquiring firms and the combined firms do not seem to be witnessing any significant change in returns.” Clearly, despite their positive intentions, India focused researchers had no idea that mergers have to be analysed separately from acquisitions; which is what we did.

Historically, it has been believed that acquisitions for the most part have destroyed shareholder wealth for the acquirers and have created wealth for the acquired target companies. Most notably, Robert F. Bruner, Dean, Darden School of Business, after studying evidence from 130 studies during the period 1971 to 2001 summarised that “target shareholders earn sizable positive market returns, but bidders (with interesting exceptions) earn zero adjusted returns, and that bidders and targets combined earn positive adjusted returns.” The research has held through the past years and Nobel Prizes have been won proving the same – that acquiring companies destroy their shareholders’ wealth and their performance, while acquired companies gain significantly in all performance parameters.

However, almost electrifyingly, our research found quite the opposite – and that is, in India for all recorded acquisitions (that could be validated and authenticated with respect to deal values through third party archiving sources) during the years 2000-06, acquirers have in general not only gained market capitalization for their shareholders, but also gained fantastically in revenues as well as net profits. Of course there were exceptions – no wonder Malcolm Gladwell made his money making the term ‘outliers’ famous – but they remained just that, exceptions! All in all, Indian acquisitions have gone splendiferously against what global researches for years have proved. And that is what makes this research extremely important – as it provides Indian CEOs with the first and most contemporary ready-reckoner guide of what to expect while going on the dangerous path of acquisitions.


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