Creation Of Value Through Cross Border Merger And Acquisitions:the Analysis Of Financial Performance Of The Indian Outbound Mergers And Acquisitions In Short Term And Long Term

Indian economy has evolved over the period of last 15 years starting from 1991.These reforms opened up the Indian capital markets to the world and brought it at par to the other major financial markets of the world.Over the years' Indian companies started looking for growth in developed markets in order to create more capabilities and resources.Since the last decade Indian companies have been active in global M&A market with the first outbound FDI happening in as early as 1980 of 4 Million USD and it reached the highest value of 21142 Million USD during 2008.The need of outbound of acquisitions were created by the aspirations of Indian companies to grow across geographies in different major markets of the world.Another reason that acted as a catalyst for the Indian companies to acquire abroad was the ease with which they could fund their acquisitions.Cross border merger and acquisition by companies across the world have these 3 reason in common most of the time,which could be “exploring new markets”,“new research and development opportunities” and “exploitation of natural resources”.With the increased activity in M&A,comes the research which is done to analyse the performance of Indian M&A.Talking about M&A as a whole,there has been a lot of research on M&A across the world,focusing on the stock returns of the acquirer during announcement and long term horizon return.Most of the studies use event study methodology to calculate the abnormal returns on the announcement date window.This study will focus on both short term and long term gains of the Indian companies doing outbound cross border acquisitions in other countries.For this purpose,the sample set consists of 43 acquisition deals which were executed from 2009 to till the last quarter of 2014.The standard event study methodology is used to compute the announcement abnormal returns.For the short term returns analysis,multiple event windows were selected for e.g.(-1,+1),(-1,0),(0,+1),(-3,+6),(-16,+2),(-16,+16)and corresponding to each event window its CAR(cumulative abnormal return)was calculated,and for long term Market capitalization on announcement day and 1 year post announcement Market capitalization.Further these returns are taken as dependent variables and independent variables carefully chosen such as size of the company(market capitalization more than USD 500 million),technology intensive industries and cultural difference.This is the first time culture difference was considered in Indian context,hereby understanding the effect of cultural difference on the returns to the acquirers.Majority of the Indian outbound acquisitions happen in TMT industry followed by Pharma,Energy and Gas.There were some deals where the Indian firm bought its supplier to enter that market and The US is the country where most of the acquisitions took place and majority of them were in TMT and Pharma.Pharma deals give easy access to the American market since firms can now bypass the initial regulations setup.Another interesting thing which came up during the analysis was that none of the Indian firms acquired someone from an unrelated industry.Focusing on the results,the study found out that cultural difference indeed has a negative effect on the returns of the shareholders,the more difference the lesser the returns.Similarly,in long run Indian firms make significant positive returns after 1 year of the merger announcement,whereas there were insignificant results available which showed that firms gained positively in the short term.In order to validate previous research available in the Indian context,we checked out data for the impact of size on the returns and found out that large cap companies tend to lose more money as compared to small cap firms,primarily because of agency issues and hubris approach by the managers which drives them into bad acquisitions.One of the issues that we faced was that,the sample size was small.Considering this is the first study which focused only on cross border outbound deals by Indian companies during the period 2009 to 2014,looking at the state of economy,lot more deals should happen in the near future.