Abstract
M&A activity in India—both domestic and cross-border—has
exhibited explosive growth in recent years. International evidence is quite clear
about the value-reducing nature of the average acquisition, both on announcement
(for the acquirer) as well as in the long run. We show that in India, in
contrast to this finding, the effects of acquisition on acquirer returns—both
on announcement as well as over a three-year post-acquisition window—over
and above the market index are significantly positive. However, the statistical
significance of the positive long-run effects disappears when we correct for
industry effects. Also acquirers do considerably worse compared to their
performance vis-à-vis the index or with respect to their relevant industry
indices in a three-year pre-acquisition window, suggesting that the acquisitions
are actually value reducing, but the markets fail to perceive them as such on
announcement.
I. Introduction
The level of activity in the market for corporate control in
India has skyrocketed in recent years. In 2007 India attracted deals
worth $68.32 billion, as compared to $28.16 billion in 2006 and
$18.35 billion in 2005. Out of this, M&A accounted for $51.17 billion
while the remaining $17.14 billion was in the form of private equity
investment. There were 661 M&A deals, including 348 cross-border
deals—240 outbound and 108 inbound. The outbound deals amounted
to $32.73 billion including such marquee deals as Tata Steel’s acquisition
of Corus for $12.2 billion, Hindalco-Novelis, and Suzlon Energy-
RE Power with transaction values of $6 billion and $1.7 billion,
respectively. The 108 inbound M&A deals amounted to $15.61 billion.1
In the span of a few short years, mergers and acquisition activity in