What Motivates Mergers and Acquisitions in India?

Abstract

This paper attempts to explore the motives behind merger and acquisition strategy of Indian corporates. Covering the domestic activity over two decades, 1998--2017, the firm-level determinants of acquiring and acquired firms are studied to analyze the merger motives. The results from Logit and discrete-time hazard model show that firms with higher technological and financial productivity are more likely to go for acquisitions. On the other hand, firms that have potential to grow in the future but are struggling at present owing to low profits or losses are more likely to be acquired. The managements of firms that are not actively involved in research activities are also likely to be replaced. The findings of the article, therefore, suggest that Indian firms are using mergers for expansionary and efficiency-enhancing motives.

Keywords:

• Mergers
• acquisitions
• firm objectives
• logit and survival analysis
• India

JEL CLASSIFICATION:

• G34
• L2

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 This statistic has been calculated after excluding the financial services. Following the previous literature (Andrade and Stafford 2004; Ali-Yrkkö, Hyytinen, and Pajarinen 2005), the financial industry is excluded because of the huge differences in accounting and nature of the financial business.

2 Right censoring means that subject has survived through the entire duration of the study. The firm has neither become an acquirer nor been acquired throughout the sample period and therefore, it has not been examined until the duration it becomes involved in a merger.

3 The definition of control group here includes non-merging firms only and not the target firms.

4 The USD value is based on the exchange rate that prevailed in March, 2023.

5 Hüschelrath and Smuda (2013) observed a significant and positive impact of cartels’ breakdown on merger activity, studying cartel cases decided by the European Commission between 2000 and 2011, and a detailed data set of worldwide merger activity.

6 They argue that high-insider ownership is a classic feature of Indian businesses. Most Indian firms are largely organized as business groups or family firms, with promoters holding majority stake. This encourages more cash deals and discourages mergers driven by market mis-valuations.

7 The likelihood of being an acquirer reaches its maximum for firms with sales growth of around 5%.

8 The likelihood of being acquired reaches its maximum for firms with total assets of around Rs 7.3 million.