Motives behind Cross border Mergers and Acquisitions and Post-hoc Operating performance analysis: A Survey of Indian acquirer companies

Transcription

1 Motives behind Cross border Mergers and Acquisitions and Post-hoc Operating performance analysis: A Survey of Indian acquirer companies Authors Dr. Vanita Tripathi Assistant Professor Department of Commerce, Delhi School of Economics University of Delhi, India vanitatripathi1@yahoo.co.in Ms. Ashu Lamba Research Scholar Department of Commerce, Delhi School of Economics University of Delhi, India ashulamba.1984@gmail.com

2 Abstract The present study is an attempt to find out the motives behind cross border mergers and acquisitions (M &A) by Indian companies. The sample data consists of 69 cross border deals by Indian companies during The tests used are factor analysis, likert scale and Independent Samples t-test and Binary logistic regression. The survey results revealed that the acquirer companies prefer quicker entry to markets and increasing new capabilities and skills while integrating with the suppliers is the least preferred motive. The acquirer companies agree that they received an increase in the sales along with an improvement in the brand image. There are five motives of cross border M & A by Indian companies derived from factor analysis-value creation; Efficiency Improvement; Market Leadership; Marketing & Strategic motives and Synergistic gains motives. The acquirer firms expect financial & cost efficiency, Stakeholders benefits and employee welfare post merger. The responses varied across the characteristics of the acquirer companies and the development status of the target company s economy. Developed economies targets are preferred on account of improving the market value of the acquirer company while companies acquire targets based in developing countries for deploying excess cash flows, saving taxes & material costs and improving their inbound logistics. The younger companies acquire foreign companies for acquiring strategic resources, integrating with the suppliers as well as the customer chain, reducing competition in the market and increasing market share. Acquirer companies in the service sector have a higher preference for decreasing selling costs, reducing competition and integrating vertically with the target and the suppliers. These companies agreed that their dividends, share price and liquidity improved post merger. Mature companies accept that their profits increased after the acquisition. The binary logistic results indicated that having value creation as the motive significantly improves the post merger operating profit margins and the returns on capital employed in the long run and the short run.

3 Motives behind Cross border Mergers and Acquisitions and Post-hoc Operating performance analysis: A Survey of Indian acquirer companies 1. Introduction What motivates companies enter into mergers and acquisitions? This has always been an intriguing puzzle in the minds of researchers. In general, companies acquire with the motive of seeking growth, enhancing market power and gaining efficiency. Trautwein, F. (1990) has classified seven theories of merger motives: efficiency theory, monopoly theory, valuation theory, empire-building theory, process theory, raider theory and disturbance theory. Johanson & Vahlne (1977) has given this theory of conventional internationalization. It states that the firms participation in international markets is incremental which starts with exports to sales subsidiaries and finally starting their own manufacturing facilities. But Luo & Tung (2007) acknowledged that the emerging markets Multinational Enterprises have a tendency to internationalize quickly as they are latecomers in global competition. They use international expansion to compensate for their competitive disadvantages. Essentially the motive is to acquire technologies and brands by emerging market MNEs. Athukrola (2009) in his paper provided an insight about Indian acquisitions abroad. Initially, India had an inclination towards Greenfield FDI projects. The first investment overseas by Indian firm was done by Birla Group of companies in Ethiopia in 1959 & in the following year in Kenya. The trend was towards formation of forming Joint ventures and setting up subsidiaries. But liberalization in 1990s led to the increase in the mergers and acquisitions. Undoubtedly, the discussion has caught more attention as emerging economies have started cross border mergers and acquisitions. Cross border M & A have become an important component of international business owing to their numerous benefits. Therefore, the present study based on survey approach has been conducted to find out what motivates acquirer companies in Indian subcontinent to go for Cross border M & A. 2. Literature review In the extant literature available, various studies have been carried out to find out the motives for entering cross border mergers and acquisitions by the companies. Berkovitch & Naraynan (1993) in their paper have studied the presence of three motives namely-synergy, agency and hubris when the firms under the study undertake takeovers. It was found that synergy is the dominant motive. Agency motive is responsible for reducing the value of the acquisitions. Hubris hypothesis says that managers make errors in evaluating the targets and the result is acquisitions which lead to mergers where there are no synergies. A similar study done by Seth et. al. (2007) finds that in case of US firms acquiring foreign firms found governance of synergy hypothesis as one of the primary motives. They also suggested presence of hubris hypothesis for few of the companies in their study s sample. In the recent literature, two more motives are being coined exploration and exploitation. These have been mostly used in organizational learning. (March, 1991). Exploration includes things like search, variation, risk taking, experimentation, discovery and innovation while exploitation include things like refinement, choice, production, efficiency, selection, implementation and execution. March (1991) recommends a balance between these two for firm s survival and success. Even

4 Wright et. al. (2005) reported that emerging economy companies acquire foreign companies on account of exploration motive instead of exploitation motive. A recent survey conducted by Rani et. al (2012) for finding the motives of mergers and acquisitions by Indian companies revealed that the companies merge with the motive of achieving synergy. The drivers behind synergies for them are operating economies. Our research on motives on cross border mergers and acquisitions tries to fill various gaps. Though a survey has been carried out by Rani N. (2012), our survey is little different from it. One we are focusing only on finding out the motives of cross border acquirers. Secondly, we have even addressed the issue whether the acquirer firms are able to achieve the expected post merger benefits. Besides this, we have studied the impact of merger motives on post merger performance. A study by Tripathi & Lamba (2013) has found that the size of the Indian acquiring companies improve post merger accompanied with a decline in profitability and liquidity. This study is adding to the literature of FDI by emerging economies. Counterpart economies of India can derive many lessons from this study. 3. Research Objective & Hypotheses In the light of the above literature discussed, the paper has made an attempt to find out the motives of cross border mergers and acquisitions by Indian companies. We have worked on the following objectives:- 1. To find out the primary motivation behind cross border mergers and acquisitions. 2. To assess the acquirer firm expectations in the form of post merger payback. 3. To analyze the differences between motives across the deal and the acquirer companies characteristics. 4. To analyze the differences between post merger paybacks across the deal and the acquirer companies characteristics. 5. To check the impact of derived motives on the post merger financial performance of the acquirer companies. Hypotheses The first two objectives were worked out using the technique of exploratory factor analysis where hypotheses are not made at the beginning. Thus, the following objectives were made for the remaining three objectives accordingly: H1: There are significant differences across deal characteristics and acquirer companies characteristics with respect to a motive preference. H2: There are significant differences across deal characteristics and acquirer companies characteristics with respect to a post merger payback preference. H3: There is no significant impact of derived motives of cross border merger and acquisitions on the acquirer companies post merger financial performance.

5 4. Data & Methodology The research objectives was met using a structured questionnaire and statistical tools like Likert scale, exploratory factor analysis, parametric statistical tools like Independent sample t-test and Logit regression. As the research objective was to find out the motives of cross border mergers and acquisitions, we focused on the companies which acquired foreign companies between the years We had 270 cross border deals initially. Since companies are involved in serial acquisitions, we found that these deals were done by 173 companies and thus these companies were considered for the survey. The primary task of this objective was design the questionnaire. We took the inputs from the questionnaire approach used in Ahammad & Glaister (2010). Our questionnaire was divided into following parts:- 1. Warm up Questions 2. Motives of cross border mergers and acquisitions 3. Post merger assessment 4. Company s Details 5. Personal Details of the Respondent Warm up questions are used to entice the interest of the respondent towards the subject of the questionnaire. Questions pertaining to human resource management and marketing issues were included in the post merger assessment part. Motives section comprised of 42 statements where eight statements were on binary scale and remaining 38 were on five point scale. There were 17 statements regarding the post merger assessment on five point scale. The questionnaire was validated with the help of three academicians and three practitioners in corporate arena. They asked for few changes and gave a green signal to carry out the survey. Selecting target audience was a very important part of our research methodology as the respondent selection has to be done with caution. Decisions involving firm s long term welfare of the firm and especially those which involve huge amount of funds are taken by the top management. Mergers and Acquisitions are too handled at the higher level of the management. Therefore, we gave thought that the right audience for this questionnaire should be the people from the top management. The audience included people from the top management, people working in departments namely M & A, Corporate finance and Strategy. The people who had spent considerable amount of time in the organization were the right people. The questionnaire was administered to the respondents using different ways. We contacted the companies through s and telephones. Since, it is the top management person who had to answer the questionnaire; we tried to get the s of the concerned respondents. At times, the personal secretaries of the respondents were also approached. Some respondents were comfortable in answering the questionnaire made in online forms in googledrive. Many respondents were interviewed over telephone. We even visited some respondents personally to get the responses.

6 Out of 173 companies acquiring companies abroad, we were able to get the contact details about the prospective respondents of 99 companies. These 99 companies had done 190 deals in our study period. We were able to get responses for 69 deals. We got a response rate of 36.3%. Response rate as per deals = 69 =36.3% Statistical tools applied 190 Likert Scale: Likert scale is a method of assigning quantitative value to qualitative data to make it amenable to statistical analysis. A numerical value is given to each potential choice and a mean figure for all the responses is computed at the end of the evaluation or survey. Likert scores have been calculated incoherently on the statements of motives and post merger assessment. Factor Analysis: Factor analysis was applied on 42 statements of motives and 16 statements of the post merger assessment separately. The main applications of factor analysis are to reduce the number of variables and to detect structure in the relationships between variables i.e. to classify the variables. Therefore, factor analysis is applied as a data reduction or structure detection method. Independent samples T-test: This was used to check the mean differences of the responses across the acquirer companies characteristics and the deal characteristics. Binary Logistic Regression: This was used to check the impact of motives on post merger financial performance on the acquirer companies financial performance by dividing the sample into two categories- Companies whose performance improved after the merger and Companies whose performance declined after the merger. 6. Empirical Results The empirical results are divided across discussing the descriptive statistics of the respondent acquirer companies, descriptive statistics of the respondents, results of likert scale and factor analysis, exploratory analysis and logistic regression. 6.1.Descriptive Statistics We got responses for 69 deals in total. These deals were done by 38 companies. These companies belonged to different age groups. For calculating the age we have deducted the incorporation year from the present year. But for division into younger and newer companies was done using median cut off criterion. The median age of the companies under study came out as 28 years. So accordingly companies incepted before 29 years were referred as Older companies whereas those companies whose age is equal or less than 29 years are classified as Younger companies. There were 38 deals done by older companies while 31 deals in total done by the younger companies for the responses we collected in total. 55 foreign companies were based in developed economies while remaining 14 were in developing economies. On a broad basis, we found that the 50 acquirer companies were from manufacturing industry and rest 19 belonged to services sector. For our analysis, we have considered this broad industry classification. We have classified the acquirer companies as per their main industry names too as per GIC and NIC approach. Majority of the responses were received from companies operating in Computer Software & ITES, Drugs & Pharmaceuticals and Materials. These details are given in the Figure 1 to Figure 5.

7 No.of Companies No.of Companies, Age greater than 29, 30, 43% No.of Companies, Age less than 29, 39, 57% Age less than 29 Age greater than 29 Figure 1: Age of the companies participating in the survey No.of Acquisitions Acquisitions done by Mature companies, 31, 45% Acquisitions done by Young companies, 38, 55% Acquisitions done by Young companies Acquisitions done by Mature companies Figure 2: Acquisitions done by Old companies and Young companies Acquisitions done in Developing Economies, 14, 20% No.of Acquisitions as per Target status Acquisitions done in Developed Economies, 55, 80% Acquisitions done in Developed Economies Acquisitions done in Developing Economies Figure 3: Number of deals done in developed and developing economies

8 Services, 19, 28% Manufacturing Manufacturing, 50, 72% Services Figure 4: Industry group of the acquirer companies Miscellaneous, 5, Automobile, 7% 3, 4% Computer Automobile Materials, 11, Software 16% & ITES, Computer Software & ITES 17, 25% Drugs & Pharmaceuticals Industrials, 9, 13% FMCG, 9, 13% Drugs & Pharmaceuticals, 15, 22% FMCG Industrials Materials Miscellaneous Figure 5: Sub industries of the acquirer companies Descriptive statistics of the respondents Table 1: Distribution of the respondents as per their official positions Designation CEO, CFO, Executive Director, Managing Director, President 11 Vice President, Directors, Heads of Different Functions 12 General Manager, Deputy Manager, Senior Manager (Finance, Merger and Acquisition, Strategy) 11 Company Secretary, General Counsel, Lead Consultant 4 Number

9 Age More than 45, 13, 27% Between 35-45, 19, 40% Between 25-35, 16, 33% Between Between More than 45 Figure 6: Age of the Respondents Between 5 to 10 years, 4, 10% Experience More than 15 years, 25, 66% Between years, 9, 24% Between 5 to 10 years Between years More than 15 years Figure 7: Work Experience of the Respondents Graduate, 3, 8% Educational Qualifications Post Graduate & Above, 19, 50% Post Graduate, 16, 42% Graduate Post Graduate Post Graduate & Above Figure 8: Educational qualifications of the Respondents We tried our level best that the responses can be elicited from the people working in the top management. We collected the responses from 38 respondents for 69 cross border deals. We even

10 interviewed the ex employees of the companies who have working knowledge of the deals in our study. Majority of our respondents are between the age group of years. 66% of the respondents had more than 15 years of work experience while 50% of the respondents had got more than post graduate qualifications Results of Likert Analysis Getting quicker entry into the new markets and increasing new capabilities and skills were highly ranked statements amongst all the motives as calculated by Likert scale technique. A Brownfield mode of entry comparatively provides a quicker way to entry to the new markets to sell their goods and services. Through merger and acquisition, a firm gets entry into the target company s readymade market. The firms get chance to exploit already established distribution channels. Establishing new operations in a new territory consumes lots of time and financial resources which are saved by acquiring an already running business. Knowledge transfer is one of an important attribute of mergers and acquisitions where both the companies learn from each other. It has been noted in the sample that Indian companies are acquiring targets established in developed/ industrialized countries. The logic could be development of new capabilities which they lack in. A report by A. T. Kearney suggests that emerging market players use M & A to increase the brand equity and move across the technology ladders. Overseas purchases help them to gain access to improved technologies. Facilitating presence in new markets, increasing sales and having business and profits at global level were also highly ranked statements of motives by the acquiring companies. Integrating with suppliers, acquiring unrelated businesses, integrating with the customer chain and saving taxes were few of the motives which we listed in our motives. The acquiring firms are not on agreement over these motives. Probably for them the generic motive of quicker entry into new markets, increasing sales and profits are more important. This could be due to Indian firms still new in the cross border M & A area. In our opinion, these motives become crucial with firms becoming more experienced in acquisitions. Table 2: Likert scores of Scores towards agreement Statements Likert scores To attain quicker entry into the new markets To increase new capabilities and skills To facilitate presence in new markets To increase the sales 4.29 To have business at global level 4.27 To increase the global profits 4.20 To achieve diversification in business activities 4.19 To augment the market share of the company To improve the company s market value To diversify the product range To improve the existing technological skills of the company To improve the marketing and sales activities To replace the old technology with a new one. 3.70

11 Table 3: Likert scores of Scores towards disagreement Statements towards disagreement Likert Scores 1 To save taxes Different for different markets to which you cater Similar for a region that you cater To acquire or merge with the company offering the same goods or services Similar to those marketed in the domestic economy by your company To integrate vertically with the customer chain To acquire a company involved in activities unrelated to your business Same for the all new markets you cater To integrate vertically with the suppliers Results of Factor Analysis Before proceeding with the factor analysis, firstly we checked the internal consistency of the 42 statements by calculating Cronbach s Alpha. Internal consistency is a measure based on the correlations between different items on the same test. It measures whether several items that propose to measure the same general construct produce similar scores. We got Cronbach Alpha as which was an acceptable measure of internal consistency for 42 statements used in the questionnaire. Kaiser- Meyer- Olkin (KMO) statistics was measured to check the sampling adequacy. Sampling adequacy tests whether the partial correlations among variables are small. It should be greater than 0.5 for satisfactorily carrying on the factor analysis. We initially got it which was a poor measure for sampling adequacy. Therefore, we checked the measure of sampling adequacy (MSA) of all the 42 statements. The anti-image matrix gave us individual MSA of these statements which were less than 0.5. We dropped statements one at a time with the minimum MSA and reduced the statements to 34 for proceeding with the factor analysis. The KMO statistic increased to giving us an indication to start with the factor analysis. Bartlett test of sphericity also came out to be highly significant. (App. Chi square= , df 561, p <0.000). It is used to test the hypothesis that the variables are uncorrelated in the population. It also tells that the correlation matrix is an identity matrix. The Eigen value was kept as 1 and the number of factors was not fixed initially. Originally, we got eleven factors but we could not justify the face validity. Therefore, the number of factors was fixed to five. These five factors explained % of the total variance. The Cronbach s Alpha of these statements came out as becoming more reliable. These five factors are explained from Table 4 to Table 8. Table 4: Factor 1 - Value Creation Motives S.No. Statements Correlation values 1 To improve the vendor management system of the company To improve the outbound logistics To improve the marketing and sales activities To improve the inbound logistics of the company

12 5 6 To improve the human resource skills and human resource management of the company To improve the company infrastructure in form of accounting, legal, administrative, financing activities To improve the capital structure To improve the after sales services To improve all the activities related to transformation of inputs to finished 9 goods To deploy excess free cash flows of the company Factor 1 derived from factor analysis gives importance to the value creation activities. In our opinion, for Indian acquiring firms besides resource and market acquisition, learning of best practices is very important. This factor explained % of the total variation of %. Entry into foreign markets can be done through various ways- exports and joint ventures, etc. An acquisition though comes at a cost, but if a company is able to imbibe the processes of value creation it can easily recover the costs in future. And in fact the other ways of entry don t provide the direct access to the processes of the company s way of working. Indian firms have always been family managed. Though, now the new generation of the companies owners is coming with foreign education which equips them with the methods foreign companies function. We found the motives of value creation highly loaded towards Factor 1. Along with that the deployment of excess cash flows and improvement in the capital structure are also important motives loaded in Factor 1. In our opinion, deployment of excess cash flows in the right investment activity along with putting the best practices can lead to higher value creation for the companies in the long run. Table 5: Factor 2 Improvement in Efficiency S.No. Statements Correlation Values 1 To reduce the manufacturing costs To decrease the material costs To decrease the labour costs To decrease the administration costs To decrease the selling costs To achieve diversification in business activities Improvement in efficiency motive is the name we have given to Factor 2. This explains a variation of % amongst all the factors. Efficiency is improved by saving the costs with maximum utilization of the resources. Hereby, we found that motives of decreasing different types of costs namely material, labour, manufacturing, administration and selling are loaded towards this factor. This signifies that the firms enter into cross border mergers and acquisitions with the intent of reducing the cost structure. This can also be referred to as achievement of operational synergies. We also found that diversification of business activities is also a motive in case of Factor 2. Diversification also helps in saving the overall costs of the firm on account of extended portfolio of different business activities. It also helps in reducing the risk of the firms.

13 Table 6: Factor 3-Market Leadership S No. Statements Correlation Values 1 To obtain economies of large scales in production To integrate vertically To augment the market share of the company To have business at global level To acquire or merge with the company offering the same goods or services To take advantage of managerial competency of the acquiring company To reduce the competition in the market This factor 3 named as Market leadership motive has all the motives which drives a firm to become a market leader. This factor explains % of the total variation. Motives like obtaining economies of large scales in production, aiming an increase in the market share, reducing competition in the market and having business at global level aim towards becoming the market leader. By combining their operations, acquired and acquiring companies can hope for a higher market share. Acquisition of companies offering same goods or services was a favored motive by companies in Drugs & Pharmaceuticals and Computer Software and ITES. This motive also helps a firm to become a market leader as exchanging and understanding a business with same product line is comparatively easier than going for a firm which is not related to the core business of the acquiring firm. Table 7: Factor 4- Marketing and Strategic Motives S. No Statements Correlation Values To acquire strategic resources like Human resources, Finance, Marketing, 1 Logistics, etc. of the acquired company To diversify the product range To integrate vertically with the suppliers To improve the company's market value To integrate vertically with the customer chain The fourth factor is named as Marketing and Strategic motives. This factor explains variation of %. Acquisition of strategic resources, improvement of market value and diversification of the product range are strategic motives. Diversification is a part of marketing strategy itself. Integrating with the suppliers and integrating with the customer chain are also one of the motives loaded in this factor. Table 8: Factor -5 Synergistic gains S.No Statements Correlation Values 1 To attain quicker entry into the new markets To facilitate presence in new markets To increase the sales To save taxes To acquire natural resources of the economy of the acquired company To acquire a company involved in activities unrelated to your business

14 The factor 5 is named as Synergistic gains. This explains a variation of 7.372%. The motives loaded under this factor are directed towards achieving synergies. Synergistic gains are achieved when there is an increase in operational efficiency, some form of financial gains (tax differential benefits or exchange differential benefits) or an increase in market power. Companies acquiring targets involved in other activities unrelated to its business with the intention to achieve tax differential benefits. This has been referred as financial synergy in the mergers and acquisitions literature. Synergies can even be achieved with the combination of two firms with the motivation of increasing the sales volume as well as the revenue. Seth et. al in their work stated market development opportunities are also a source of synergistic gains. When the growth in the home market is limited or exports to a foreign country are restricted due to trade barriers, an acquiring firm will try to acquire an already established firm for a quicker entry in the market Results on Post Merger Assessment This section discusses the results of responses of the second section of the questionnaire named as post merger assessment. The statements have been analyzed using the Likert scores and Factor analysis. Likert Scores of the statements Table 9: Likert Scores of Post merger Assessment towards Agreement S. No. Statements Likert Score 1 Company s brand image has improved post merger Sales have increased subsequent to cross border M & A Existing employees by and large were retained post merger Employees morale boosted post merger Employees were able to overcome the cultural differences Company s managerial efficiency has enhanced post merger Company s share price has increased in long run after merger Customer and sales force attrition has been minimized Table 10: Likert scores of statements towards disagreement S. No. Statements Likert Score 1 Company has been able to realize the tax gains from the merger Company s liquidity has improved post merger Company s debt to equity ratio has declined post merger Company has started paying more dividends post merger Likert scores in the Table 9 and 10 reflect the opinion of the respondents subsequent to the M & A. Most of the respondents agreed that the company s brand image has improved subsequent to the merger. The likert score of this statement is There was a conformity that the sales post merger has increased. The existing employees were by and large retained after the merger. When we spoke to the respondents acquiring targets in Europe, we got knowledge about European employment rules and in this context Italian laws are very strict and sensitive to the issue of retrenchment. An

15 acquiring foreign company cannot retrench employees in Europe. Some of the respondents even told that the foreign entity works separately. The Indian parent acquirer makes the important decisions and provides capital to the acquired companies. Regarding the statements on disagreement, most of the respondents disagreed to the fact that the companies have started paying more dividends post merger. In fact, one of the respondents said that the increase in the dividends is not a function of success of the merger for his company. We even found a disagreement of the respondents towards a decline in debt to equity ratio reported by the likert score of And likewise there was a consensus for the decline in liquidity too. The respondents readily accepted that their companies faced a liquidity crunch after the acquisition. 6.5.Results of Factor Analysis We applied factor analysis on the 17 statements of the post merger assessment of our questionnaire. The Cronbach Alpha of these statements came out to be which was good number to prove internal consistency. Kaiser-Meyer-Olkin Measure of Sampling Adequacy was 0.681, mediocre enough to begin with the Factor analysis. Bartlett s Test of Sphericity also proved the hypothesis that the correlation matrix is an identity matrix. It came out to be highly significant. (Approx. Chi-Square df 136 Sig. 0) The extraction method used is Principal Component Analysis and the rotation method applied is Varimax with Kaiser Normalisation. We kept the factors fixed to three based on Eigen value greater than one. These factors are explained variance of 56.72% of the total variance. These factors are discussed in the Tables - 11, 12 and 13. Table 11: Factor 1-Cost & Financial Efficiency S. No. Statements Correlation values 1 Company was able to decrease the average cost of capital Employees were able to overcome the cultural differences Customer and sales force attrition has been minimized The financial reporting practices of the company have improved post merger Company's managerial efficiency has enhanced post merger Company's liquidity has improved post merger Company's debt to equity ratio has declined post merger Operating costs have declined subsequent to cross border M & A Company has started paying more dividends post merger Factor 1 under post merger assessment has been named as Cost and Financial efficiency. This factor explained 25.92% of the total variance. Companies expect many benefits or synergies when it makes up its mind for acquiring a foreign target. They come in the form of improvement in the synergies namely financial synergies and operating synergies. In our opinion, a reduction in operating costs is related to liquidity. The money saved from reduction in the operating costs will help in increasing the overall profits. When the employees of both the acquiring and acquired companies are able to overcome the cultural differences, the companies are able to save upon the expenses on training and development and other expenses on adjustment. Companies even think that the improvements in the managerial efficiency after the merger help in achieving the cost and

16 financial efficiency. An efficient manager also contributes towards improving the financial and cost efficiency by learning from the foreign target s practice. Expecting improvements in liquidity, decline in debt equity and reduction in the cost of capital are directed towards financial efficiency. Table 12: Factor 2- Stakeholders Benefits S.No. Statements Correlation Values 1 Company's share price has increased in long run after merger Profits have increased subsequent to cross border M & A The financial incentives of the employees have increased post merger Sales have increased subsequent to cross border M & A Company's brand image have improved post merger Company has been able to realize the tax gains from the merger Factor 2 has been given the name as Stakeholders Benefits. This factor explains a variance of 18.67% amongst all the three factors. This factor is aimed at the post merger expectation set for the stakeholders of the companies. In the results for Factor 2, we observed positive loadings for the benefits expected by the shareholders and the employees. Any long term investment is done to enhance the stakeholders benefits. The stakeholders include shareholders, customers, employees, management, creditors, debtors, government and all those people who have financial interest in the company s affairs. All the statements of the factor 2 indicate that the acquiring firms expect that the stakeholders (shareholders and employees in this case) should gain subsequent to the acquisition. Shareholders being the provider of capital expect an improvement in the profits and capital gains. An enhancement in the returns for shareholders comes with increase in the profits which is a result of a jump in the sales revenue. A positive consequence of a jump in the profits is improvement in the company s brand image. A company delivering consistently high profits views a positive run up in its share price in the long run and ultimately satisfies the demand of capital gains of the shareholders. Another set of the stakeholders which gets pleased due to company s performance is the employees. A profit generating firm is able to provide its employees with the financial incentives to keep them motivated. Employees motivation is necessary for the running of the companies because they are the ones who work for revenue generation. Table 13: Factor 3- Employee Welfare S. No. Statements Correlation Values 1 Existing employees by and large were retained post merger Employees morale boosted post merger The third factor is employee welfare. This explained 12.13% of the variation amongst all the three factors. Acquiring companies in general agreed to the statements that the existing employees were by and large retained after the merger and the employees received a morale boosting after the merger and acquisition.

17 6.6.Results regarding Impact of acquirer company s characteristics and deal characteristics on Motive selection and Post merger Assessment In this section, we have studied the effect of the acquiring company as well as the deal characteristics on the preference of motives. Besides this, the effect of these characteristics has been examined for the post merger benefits. Acquiring company s characteristics include the age of the company and the industry in which it is operating. The age of the company has been calculated as the difference between the current year and the year of the incorporation. The companies have been classified as young and old companies. This has been done by estimating the median age of the acquiring companies which is 29 years. This median is kept as the cut off for dividing them. The Young companies are those whose age is less or equal to 29 years. The Old or mature companies are those which are incepted before 29 years. We have used the terms old and mature interchangeably. Similarly, the companies are divided as per their industry of operation Manufacturing and Services. By deal characteristics, we mean the status of the acquired company s economy s development. Thus, the categorization is companies going for developed economies target acquisition and the other set of the companies are those which acquire targets based in developing economies. The mean differences have been statistically checked separately for factors as well the individual motives of the factors for all these characteristics discussed. This has been done using Independent Sample t-test as the all the divided groups are not equal in size Empirical Results on Differences across Company and Deal characteristics This section of our study lays emphasis on the results we got for the differences for Factors on motives and post merger benefits. The statistical results for preferences for the factors representing motives are presented in the Tables 14 to 19. And the results for the factors under post merger benefits have been discussed in the Tables 20 to 22. Table 14: Preference of Motives under Factor 1 as per the age, industry of the acquiring company and development status of the Target s economy S. No. Factor 1-Value Creation Age Mean M.D p I Mean M.D p D.S Mean M.D p 1 To improve the vendor management system of the company 2 To improve the outbound logistics 3 To improve the marketing and sales activities. 4 To improve the inbound logistics of the company. To improve the human resource 5 skills and human resource management of the company To improve the company infrastructure in form of 6 accounting,legal,administrative and financing activities 7 To improve the capital structure

18 8 9 To improve the after sales services To improve all the activities related to transformation of inputs to finished goods. 10 To deploy excess free cash flows of the company Here Age means Age of the Acquiring Company since inception, M.D means Mean Difference, I means Industry of the acquiring company, D.S mean Development Status of the Target s Economy 0 = Acquiring company s age is greater than 29 years, 1 is otherwise 0 = Deals in Manufacturing Industry, 1= Deals in Services Industry in case of Industry; Devt. Status means of Development Status of the Target s Economy; 0 = Deals in Developed Countries, 1= Deals in Developing Countries in case of Development Status of the Target s Economy Table 14 demonstrates that both young and mature equally favor all the motives under value creation. The null hypothesis for all the statements is consistent for all the motives under the factor 1 except the motive for improving the human resource skills and human resource management of the acquiring company. The younger acquiring companies have higher preference for improving their human resource skills and human resource management. The young firms are those who have lesser experience in various areas owing to their stage in the life cycle. They learn by doing. But the young firms being new tend to learn fast and have an enthusiasm to deliver higher profits. Young firms appear to be more innovative than established firms are (Scherer, 1980). Probably, motivation of competing hard with the mature and established firms encourages them to acquire foreign firms. Venture capital funds and Private equity funds have grown in India to support the acquisitions by young firms. As such, there is no significant difference between the preferences for different motives under Value creation as far as the industry of the acquired company is concerned. But, it is only found to be significantly varying for the motive of improvement in marketing and sales activities. Acquiring firms operating in manufacturing sector favored this motive. It is found to be significant at 10% level of significance. Between the motives of the value creation, it is found that when companies go for acquisition of developing country s targets, the acquiring firm s intention is deploy their excess cash flows. The reasons could be the Indian acquiring companies purchase targets based in developing countries to establish new markets as there are comparatively lesser number of established players. We even found that in case of developing economies, the deal value is less in case of our sample deals. Most likely, the acquiring firms are not apprehensive of smaller investments. An observation of the sample informs that many acquiring firms have already bigger acquisitions in the developed countries earlier and later they are foraying in developing countries. But some other reasons for deploying their cash flows to developing countries could be governments of these countries are devising measures to draw FDI in their countries.

19 Table 15: Preference of Motives under Factor 2 as per the age and the industry of the acquiring company and the development status of the target s economy S. No Factor 2-Efficiency Age Mean M.D p I Mean M.D p D.S Mean M.D p 1 2 To decrease the manufacturing costs. To decrease the material costs. 3 To decrease the labour costs To decrease the administration costs. To decrease the selling costs. To achieve diversification in business activities Here Age means Age of the Acquiring Company since inception, M.D means Mean Difference, I mean Industry of the acquiring company, and D.S means Development Status of the Target s Economy 0 = Acquiring company s age is greater than 29 years, 1 is otherwise in case of Age 0 = Deals in Manufacturing Industry, 1= Deals in Services Industry in case of Industry; 0 = Deals in Developed Countries, 1= Deals in Developing Countries in case of Development Status of the Target s Economy The Table 15 shows that the younger firms acquire cross border targets to reduce the selling costs. The mean difference between the preferences for this motive is significant at 5% level. Otherwise, younger firms being relatively new strive for overall cost efficiency. But here the younger firms are more concerned about reduction of the selling costs. The reason could be mature firms are more proficient to reduce their cost structure owing to their experience, bargaining power in the market and large economies of scale. Thirty eight cross border deals in our sample have been done by the young companies out of which nineteen are from service sector. For the acquiring firms operating in services industry, motives of diversification in business activities and decreasing the selling costs are found to be statistically very important amongst all the motives of efficiency. All the respondent acquiring companies in service sector in our sample are a part of Computer software and ITES and Telecommunications sector and they belong to the group of young companies only. For younger companies, reducing the selling costs is imperative. Also when a young service based company goes abroad, it has to compete with existing established players who already have a hold in the market. The acquiring companies doing acquisitions in the developing countries give relatively higher importance to the reduction of material costs. The mean difference is found to be significant at 5 % level.

20 Table 16: Preference of Motives under Factor 3 as per the age and the industry of the acquiring company and the development status of the target s economy S.No Factor 3-Marketing Leadership Age Mean M.D p I Mean M.D p D.S Mean M.D p 1. To have business at global level To take advantage of managerial competency of the acquiring company To augment the market share of the company To reduce the competition in the market To obtain economies of large scales in production To integrate vertically To acquire or merge with the company offering the same goods or services Here Age means Age of the Acquiring Company since inception, M.D means Mean Difference, I mean Industry of the acquiring company, and D.S means Development Status of the Target s Economy 0 = Acquiring company s age is greater than 29 years, 1 is otherwise 0 = Deals in Manufacturing Industry, 1= Deals in Services Industry in case of Industry; 0 = Deals in Developed Countries, 1= Deals in Developing Countries in case of Development Status of the Target s Economy. The Table 16 depicts that the null hypothesis is inconsistent for the motives - taking advantage of the managerial competency of the acquiring company, augmenting the market share, reducing competition in the market and integrating vertically with the target. These motives are relatively more preferred by the young companies. The mean differences of these factors are significant at 5% level. This denotes that the Indian acquiring companies which have incepted quite recently are more eager to become market leader. This could be owing to meeting the expectation levels of the shareholders. It is relatively difficult for the younger firms to raise the capital owing to the risk involved, inexperience and uncertainty of returns. That s why the younger firms have higher preference these motives more than the mature firms. As far as the motives of market leadership are concerned, acquiring firms operating in manufacturing and services are indifferent towards all of them except two of the motives. For the service based firms, reducing competition in the market and integrating vertically with the target are crucial motives. The mean differences compared with the acquiring companies in manufacturing sector are significant at 5% and 10% levels respectively. No doubt, India is considered as a leader in information technology skills worldwide. Perhaps, this confidence drives the IT firms to enter into cross border acquisitions with the motive of reducing the competition in the market. Indian

21 companies making acquisitions in developed economies are keener towards merging with firms which are the similar to them in terms of goods and services. This came out at significant at 10% level. We observed that the deal size in case of cross border merger and acquisitions is larger in case of developed countries. It could be that the acquiring firms enter with the intention of merging with the same kind of firms so that they can get a market access and diversify in future. Table 17: Preference of Motives under Factor 4 as per the age and the industry of the acquiring company and the development status of the target s economy S.No Factor-4 Marketing & Strategic Gains Age Mean M.D p I Mean M.D p D.S Mean M.D p To acquire other strategic resources like Human resources, Finance, Marketing, Logistics, etc. of the acquired company To diversify the product range To integrate vertically with the suppliers To improve the company's market value. To integrate vertically with the customer chain Here Age means Age of the Acquiring Company since inception, M.D means Mean Difference, I means Industry of the acquiring company, D.S means Development Status of the Target s Economy 0 = Acquiring company s age is greater than 29 years, 1 is otherwise 0 = Deals in Manufacturing Industry, 1= Deals in Services Industry in case of Industry; 0 = Deals in Developed Countries, 1= Deals in Developing Countries in case of Development Status of the Target s Economy There are significant differences amongst some motives under Marketing and Strategic motives as per the age of the acquiring companies in our sample. The mature companies relatively give more importance to the marketing motives of integrating with the suppliers as well as the customer chain at 5% and 1% levels of significance. Since, these firms are already established; the next step of increasing market power is to integrate vertically downward and upward. Conversely, for the acquiring firms in young companies group, the motive of acquisition of strategic resources is more important as the mean difference is found to be significant at 10% level. The reason could again be the life cycle of the firms. Mature firms already are equipped with the strategic resources taking into account the experience and time they got to become old in the industry. It is found that the manufacturing companies preferred vertical integration with the suppliers over companies in service sector. Vertical integration helps in reducing costs in terms of reducing turnaround time as well as transportation costs. It also facilitates in increasing market power as well as competitive advantage. Companies acquiring in the developed countries facilitate an increase in the market value.