September - 2011 - issue > Anniversary Special
Sanjai Bhagat,Shavin Malhotra & PengCheng Zhu
Friday, September 2, 2011
Cross-border acquisitions (CBAs) are an important strategic corporate initiative that enables firms to extend their current businesses, leverage their current capabilities, and/or diversify in to related markets. CBAs have increased significantly over the last two decades. According to the World Investment Report published by the United Nations Conference on Trade and Development, CBAs played a major role in the recent increase of overall world foreign direct investment (FDI). CBAs increased by 88 percent to $716 billion from 2004 to 2006, and the number of deals rose by 20 percent to 6,134 during the same period. Of these deals, 14 percent were large deals valued at more than $1 billion.

Although multinationals from developed countries account for the major share of CBAs, firms from the developing countries too have entered this market in a big way. In 2005, CBAs by developing-country firms accounted for 13 percent (approximately $90 billion) of all global CBAs, and 17 percent in terms of the number of deals, increasing from 4 percent and 5 percent from 1987, respectively. CBAs have become a major mode-of-entry for developing-country firms into other countries We examine a sample of 437 CBAs made by Indian firms during 1994 through 2007. Figure 1 shows the total number and the total transaction values of the completed CBAs in the sample. Both the transaction numbers and values increase substantially in the sample period. The most striking increase is observed during 2002-2007 when the total CBA value increased by six times, from about $1 billion in 2002 to $6 billion in 2007 and the number of transactions increased about five times.

The largest number of targets are from the U.S. (143 targets), followed by U.K. (64 targets), Germany (21), Singapore (21), and Australia (16). It is important to note that majority of the acquisitions by the Indian firms were carried out in the developed countries. Since developed countries predominate as target locations for CBAs, it may suggest that Indian firms follow a market-seeking and an asset-seeking international strategy. The larger markets and the potential to expand into other regional markets (many regional arrangements exist across North America and Europe) are some of the attractions for Indian acquirers targeting developed markets. In addition, many Indian firms are trying to augment their strategic assets by acquiring skills and knowledge capital, high-end brands, distribution networks and advanced technology. Tata group of companies, recently on a global acquiring spree, has concentrated most of its acquisitions in developed markets (for example, acquisition of Corus and Tetley in United Kingdom; Eight O’clock Coffee in the United States, and Natsteel Asia in Singapore).

In the 1990s target values tended to be small (by U.S. transaction value measures) averaging about $10 million (in 2006 dollars); the largest was only $74 million. During 2000-2007, ten acquisitions are worth half billion dollars each, with four worth a billion dollars each. The largest acquisition in our sample is of Corus Group by Tata Steel. Not surprisingly, given the small size of most acquisitions, the vast majority of targets are privately-held companies; only 24 targets are publicly-held companies.

We compute the stock market’s reaction (announcement period abnormal returns) for Indian acquirers. Indian acquirers experience an average market response of 1.53 percent on the announcement day. This return is statistically significant. The positive announcement return is consistent with the following hypothesis: The acquirer voluntarily bootstraps itself to the higher governance standards of the target – resulting in a positive valuation impact on the acquirer.

Table 1 notes acquirer announcement period returns categorized by various acquirer and target characteristics. Smaller acquirers experience a more positive announcement period return (Panel A). Acquirers that pay for the acquisition with cash experience a more positive return compared to acquisitions paid for by the acquirer’s stock (Panel B). Acquisitions of privately-held targets generate more positive returns for acquirers than acquisition of publicly-held targets (Panel C). Acquirer returns are positively correlated with the relative size of the acquisition (Panel D).

We next categorize returns of Indian acquirers by governance and other characteristics of the target’s country. Acquisitions of targets in higher per capita GDP countries is correlated with higher acquirer returns (Panel E). However, this relationship is not monotonic; acquirer returns for targets in medium per capita GDP countries are larger than for targets in high per capita GDP countries. Acquirer returns from acquisition of targets in English legal origin countries are higher than French legal origin countries (Panel F). Acquirer returns are positively correlated with target country government effectiveness (Panel G), and target country anti-corruption index (Panel H). Government effectiveness and a culture of anti-corruption are positively correlated with better corporate governance at the country level. Finally, Panel I suggests that when Indian companies acquire targets in countries with similar cultural traditions, their returns are more positive.

The authors are:
Sanjai Bhagat, Provost Professor of Finance, Leeds School of Business, University of Colorado
Shavin Malhotra, Assistant Professor of International Business, Co-Director, International Research Institute, Ted Rogers School of Business Management, Ryerson University
PengCheng Zhu, Assistant Professor of Finance, Eberhardt School of Business, University of the Pacific Stockton

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