Sunday, December 30, 2012

When Indian companies turn acquirers, is wealth created for shareholders of the acquiring firms?

A Sandeep
A. Sandeep, Group Editorial Director, Business & Economy, presents a quantitative study on acquisitions by Indian companies involving both Indian and Foreign targets. Do such acquisitions destroy value (as has been commonly reported by scholars and researchers in the past)? And do market sentiments alone influence the change in market value of buyers, thereby negating the effect of the very acquisitions?

Globally, the outcomes of mergers and acquisitions (M&As) have been analysed at length. However in the Indian context, due to factors such as lack of data availability in the public domain, lack of transparency in deals et al, such studies have been rare. More so, studies discussing the outcomes of acquisitions by Indian companies alone have been the rarest. We developed a methodology to collect and analyse data on acquisitions by Indian companies. We had two scenarios: (a) Indian companies buying Indian targets (referred hereon to as India-India); and (b) Indian companies buying Foreign targets (referred hereon to as India-Foreign). The performance of each acquirer on a certain parameter (market capitalisation) was tracked down and mapped during the pre and post-deal periods. Our final conclusions were arrived at by studying 167 deals involving Indian firms as acquirers. We focused on the importance of using m-cap as a performance indicator. Critically, checks were introduced on whether statistical significance differences exists between the changes in m-cap of acquirers and changes in the standard index (BSE Sensex) under various control environments (like Sensex and non-Sensex acquirers, various time windows et al).

The results we observed turned out to be quite opposite of what studies on acquisition globally have stated – that acquisitions erode wealth for the acquirers’ shareholders. The mirage of synergy playing a role in destroying hopes of acquirers’ shareholders to gain wealth have been identified and proven by a number of academic scholars, consultants and research firms. Most of them use changes in financial metrics (like market capitalisation) to arrive at a conclusion. In the NBER Working Paper titled, ‘Do Shareholders of acquiring firms gain from acquisitions? (2003)’, scholars Sara B. Moeller (Cox School of Business, Southern Methodist University), Frederik P. Schlingemann (Katz Graduate School of Business, University of Pittsburgh) and RenĂ© M. Stulz (Fisher College of Business, Ohio State University), state, “We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. Shareholders of these firms lost a total of $218 billion when acquisitions were announced. Though shareholders lose throughout our sample period, losses associated with acquisition announcements after 1997 are dramatic.” In another study for The ESRC Centre for Business Research, University of Cambridge, titled, ‘Do takeovers create value? (2002)’, researchers Magnus Bild, Mikael Runsten (Stockholm School of Economics) and Paul Guest and Andy Gosh (Centre for Business Research, Cambridge University Judge Institute of Management), report that, “on average, acquisitions destroy roughly 30% of the acquirer’s pre-acquisition value.” According to James Heskett, Baker Foundation Professor, Emeritus, at Harvard Business School, “Acquirers often end up bargaining for a seat on the loser’s bench.” In his paper titled, ‘Should We Brace Ourselves for Another Era of M&A Value Destruction? (2004)’, he sums up thus, “Research tells us that the short-term value in an acquisition accrues primarily to shareholders of acquired companies. On the other hand, short-term value is more often destroyed than created for shareholders of acquiring organisations. As many as two-thirds of all acquirers fail to achieve the benefits planned at the outset of an acquisition. In the end, M&A is about buying more volume. It is a flawed process, invented by brokers, lawyers, and super-sized, ego-based CEOs. Acquisitions are a macho exercise, not an intellectual one. Think World Wrestling Federation, not a chess tournament.”

In our study, we conclude that acquisitions – whether it be India-India or India-Foreign – create significant value for the acquirers’ shareholders. This brings us to the surprising conclusion that for CEOs of Indian companies, inorganic growth strategy is value-creating.

Also, we tested the influence of the general market movements on the m-cap movement of the acquiring companies in question. Under many-a-situation, T-tests results convinced us to reject our null hypothesis (Ho --> md = 0, where md is the difference between the statistical means of the two samples under consideration. In other words, the null is that there is no statistically significant difference between shareholder wealth change and Index change).

The need for the study was considered more urgent because of the increasing M&A activity in India and the resulting rising exposure of Indian acquirers to M&A activity. In 2000, M&A activity in India stood at $5.4 billion. This rose to $16.3 billion in 2005 ($20.30 billion in 2006, $51.11 billion in 2007, $30.90 billion in 2008, $60.7 billion in 2010) and a higher $34.4 billion in w2011. More critically, outbound M&A deals have also risen over the years. Between 1992 and 2001, Indian companies invested up to $4.97 billion in cross-border M&As (UNCTAD, 2002). This rose to $9.47 billion in 2005 alone and to a higher $31.53 billion in 2010 (though the value fell to $8.81 billion in 2011; source: Grant Thornton and Ernst & Young reports).

This paper is therefore an attempt to filling some present gaps in what has been studied, documented and analysed so far in the discipline of acquisitions in India.


We adopted a systematic approach to the study. Based on past scholarly researches on the subject, the following decisions were taken at the start: 1. Decision on time windows (t-2, t-1, t, t+1 & t+2); 2. Decision on collection of samples (India-India deals and India-foreign deals); 3. Decision on using significance tests.

To collect data, we used databases including Thomson Reuters M&A records and Grant Thornton’s M&A Dealtracker. Only those deals that fell under the category of “acquisitions” were selected (to avoid diluting the focus/object under study by taking a combine of mergers and acquisitions). The deals under study also strictly involved acquirers that remained publicly listed during the post-deal event windows taken.

The outcome of the deals on the acquirers’ shareholders were studied in the following time windows: 1 year (t to t+1; t being date of deal announcement, and t+1 being one year from the date of deal completion), 2 years (t-1 to t+1 and t to t+2; t being date of deal announcement, t+1 being one year from the date of deal completion, t-1 being one year prior to the date of deal completion; and t+2 being two years from the date of deal completion); and 4 years (t-2 to t+2; t-2 being two years prior to the date of deal completion; and t+2 being two years from the date of deal completion).

In order to understand the outcome, we went with the most widely-held view that since the CEO is the public representation of the company, his performance is displayed in the company’s stock performance, and whatever deal-making happens, should be in the interest of maximising shareholder wealth. Therefore all changes in post-deal performance should be reflected in the company’s market capitalisation, a view also adopted by G. Wan Ng (2007), Martin Sikora, Wharton School of Business (2005), Holthausen (2005), Mauboussin (2010), Moeller, Schlingemann and Stulz (2003), and many more scholars in their respective works.

To test for significant differences between means of two sets of samples, we conducted T-tests in order to verify whether it was actually the general rise/fall of market trading sentiments that contributed to the rise/fall in the shareholder wealth of the acquirers [a practice adopted by researchers like Moeller, Schlingemann, Stulz (2003), Maditinos, Theriou, Demetriades (2009), Gersdorff, Bacon (2008), and others]. We took a precision ceiling of 95% in the process (the alternative is two-tailed and represents a 95% Confidence Interval, C.I.). The assumptions underlying this paired sampled t-test are: 1. Observations collected are independent of each other; 2. The data points are normally distributed in the population; and 3. The null hypothesis follows the strict form of “neutral/control” hypotheses used in statistical studies, and corresponds to a general or default position.

There is a spike in deal making during times when markets experience a boom (Mauboussin, 2010). Our intent was to include “normal economic” circumstances. The choice of sample collection years was therefore taken between 2001 and 2006. The reason being that first, it gives us a reflection of a large number of “normal, recent business” years to collect samples from. Second, it takes care of the exclusion of the effect of post-bubble in the Information Technology sector and the pre-bubble period and slowdown in the Indian economy – which can be understood by the very fact that M&A activity in India rose abnormally from $20.30 billion in 2006 to $51.11 billion in 2007, and then fell to $30.90 billion in 2008 before plunging to $16 billion in 2009 – the year slowdown struck the global economy – thereby giving us “normal business years” as time range to collect data from.

Findings and Observations

1. Market capitalisation change test Our findings of the tests that give a measure of shareholder wealth change in the case of India-India deals are shown in Table 2, and those for India-Foreign deals are shown in Table 3.We find that shareholder wealth is created when Indian companies turn acquirers, irrespective of whether the targets are foreign or Indian companies. Our analysis reveals that in the case of both India-India and India-Foreign acquisition samples, m-cap of acquirers rise, thereby going against observations made globally. In the case of India-India deals, the sample of 76 acquisitions create value under all four event windows: t-2 to t+2, t-1 to t+1, t to t+1 and t to t+2. There is more shareholder wealth created during the first year post-merger (t to t+1) as compared to two years post merger (t to t+2). Maximum wealth is created during the largest event window of four years, t-2 to t+2. Deal size-wise findings are quite similar. In Level 1 (value < $10 million), Level 2 ($10 million = value < $50 million) and Level 3 deals (value > $50 million), the highest appreciation for the acquirers’ shareholders are noted for the event window t-2 to t+2. This event window also corresponds to the highest average (per buyer) increase in shareholder wealth created by acquirers. Interestingly, the effect of the acquisition is also found to be higher in the first year post-deal, as compared to two years post-deal.

In the case of India-Foreign deals, the sample of 91 acquisitions create value under all four event windows. In Level 1 (value < $50 million), Level 2 ($50 million = value < $250 million) and Level 3 deals (value > $250 million), the highest appreciation for the acquirers’ shareholders are noted for the event window t-2 to t+2. The favourable effect of the acquisition is found to rise as a function of time over the two years following the deal, with rise in m-cap of acquirers being higher in the t to t+2 period when compared to the t to t+1 time frame. 2. Significance testsAfter measuring changes in shareholder wealth, we proceed to check whether the acquisitions might actually have ‘any’ role to play in the changes in m-cap of acquirers..

For four different event windows, we checked for the significance in difference between the sample means of two given samples:
(1) The change in market capitalisation of acquirers during a certain event window (t-2 to t+2, t-1 to t+1, t to t+1 and t to t+2); and
(2) The corresponding change in Sensex during the same event window considered in (1) above.

T-test on India-India deals

The Sig value (p) turns out to be less than a (0,05) in all the four event windows therefore we reject the null hypothesis. Also, the critical value of t arrived at does not fall between the critical range (tc). Therefore, we reject the Null in favour of the Alternate hypothesis. We conclude that there exists a significant difference between the means of the change in the two variables. Therefore, the change in m-cap is influenced by factors other than the change in Sensex, and one of the possible influencers could be the acquisition of a target.

In order to understand whether the inclusion of Sensex companies in the buyer group in the India-India analysis influenced our Significance test results, we divided the buyer group into two segments, depending on their inclusion in the Sensex during the announcement of acquisition.

Acquirers belonging to Sensex: Only in one time window (t-2 to t+2) was the null rejected. Therefore in a majority (75%) of event windows, it was proven that there exists no significant difference between movement of the Sensex and acquiring companies. The results turned out as expected.

Acquirers NOT belonging to Sensex: Null is rejected in all time windows. We conclude that in all four windows, there exists a significant difference between the means of the change in the two variables. Therefore, the change in m-cap is influenced by factors other than the change in Sensex, and one of the possible influencers could be the acquisition of a target.

T-test on India-Foreign deals

The Null is rejected in two (relatively shorter) event windows: t to t+1 and t-1 to t+1. We conclude that in these above stated intervals, the change in m-cap of acquirers is influenced by factors other than general market movement/sentiment, and therefore the very acquisition could be an influencer.

Acquirers belonging to Sensex: Only in one time window (t to t+1) was the null rejected. Therefore in a majority (75%) of event windows, it was proven that there exists no significant difference between movement of the Sensex and acquiring companies.

Acquirers NOT belonging to Sensex: Null is rejected in a majority of time windows (75%; except in t-1 to t+1 event window). We conclude that in a majority of these event windows, the acquisition could have caused the change in m-cap of acquirers.


Friday, December 28, 2012



I think entrepreneurship is our natural state – a big adult word that probably boils down to something that’s much more obvious like playfulness.
Sir Richard Branson
Founder, Virgin Group

Entrepreneurial zeal can be fuelled by several innate desires. It could be about value creation, a love for a particular industry, a passion for contributing to society, testing your ‘personally defined’ limitations or even about building a name you can leave behind when you are gone. When we are talking about Virgin Group Founder Richard Branson, the above quote perhaps summarises his main driving passion best. His secret, at the cost of sounding overtly simplistic, is that he is an entrepreneur who loves entrepreneurship itself!

When my office caught up finally with him, to question him on his definition of what makes a cult entrepreneur, we had to also keep in mind that this was a man who had regularly written for 4Ps B&M for a long time preaching exactly that. Entrepreneurship is an affair that, for Branson, began even before he started the Student magazine at the age of 16, because he had already dabbled unsuccessfully with selling budgerigars and Christmas trees by then. From its inception in 1970 to today, the group operates nearly 400 businesses across mobile telephony, travel, financial services, leisure, music, holidays and health & wellness; with total revenues at around $21 billion in 2011. This means that the Virgin group has incubated nearly 10 ventures every year on an average!

Yet, you would not find Branson anywhere among the top echelons of the world’s richest. As per the Forbes’ Billionaires’ rankings for this year, Richard Branson’s net worth was estimated at around $4.2 billion in March 2012, and he was ranked #255 in the overall rankings. The same goes for their flagship company Virgin Media, which posted annual revenues of $6.1 billion in 2011. It was ranked #359 in the Fortune 500 list for 2010, dropped further to #374 in 2011 and dropped out of the list in 2012 altogether. But if you are mustering up a list of the world’s most iconic CEOs, I am willing to bet that Richard Branson will figure in the top ten in terms of recall. This is just one of the several inherent contradictions that have gone on to define both the man and the multi-billion dollar business empire that he runs.

Is being outrageous a great branding ploy? If CEOs want to give it a shot, Branson is certainly the global benchmark, by all yardsticks. His publicity stunts are legendary; be it appearing for the Virgin Atlantic launch in pilot’s uniform, coming out in a bride’s dress with make up for the Virgin Brides venture, driving a tank up Fifth Avenue and destroying the Coca Cola sign at Times Square or jumping off the Palm’s Hotel Casino to celebrate the launch of the first Virgin American flight. His hot air balloon flights across the world are celebrated in aviation (and business) history. “Virgin Atlantic Flyer” happens to be the largest hot air balloon ever to take flight and it also broke a new record by being the fastest to traverse the Atlantic. When he came to Mumbai this year, he was quite a spectacle in traditional Indian dress on top of the common yellow & black Mumbai taxi. Branson has embraced the unconventional several times and often at great risk. The Sex Pistols is a remarkable case in point. The punk band had come up with a politically incorrect version of “God save the Queen” in the 1970s and faced a great deal of censure, with even their recording company A&M giving up on them. At that time, who else would dare to sign them up but Virgin Records? Not just that, Virgin, along with the band’s manager Malcolm McLaren, hit upon a novel idea to make the band play their anti-establishment number while on a ride across the river Thames and opposite the British parliament! Branson has often rubbed British Airways officials (the airline whose monopoly Branson sought to break when he launched Virgin Atlantic) on the wrong end. Off late, British Airways CEO Willie Walsh claimed that Branson is about to give up control of Virgin Atlantic, which posted a revenues of £2.74 billion and an operating loss of £80.2 million in the financial year ending February 2012. In response, Branson has publicly challenged Walsh and BA. He claims that if Virgin Atlantic closes down within five years, he will pay £1 million to BA staff, and BA must do the same for his staff if the airline survives (Walsh countered with a ‘knee in the groin’ wager).

Branson has a distinct preference for industries where Virgin can potentially disrupt the status quo. Conversely, he defies the concept of core competence in branding and says that Virgin is a ‘way of life’ brand, which he has deployed across businesses. Indeed, the man’s voracious appetite for risk (he is planning, quite seriously to take thousands of people into space as well as to the bottom of the ocean in the near future) and for overstretching himself in the public domain has contributed a great deal to what he is today. But there are other key aspects to the Branson magic. Arguably, the foremost among them is his managerial philosophy that puts employees first and customers second. Branson firmly believes that if employees are kept happy, they will, in turn, do what’s best for the business and its customers. In his interaction with my team, he described the key qualities of a successful entrepreneur, “Every entrepreneur should possess qualities of positive attitude in terms of understanding and solving employees’ problems, meeting their evolving needs on the professional front by communicating with them very often, being very transparent in terms of explaining the company’s new ideas of business strategies & policies, and seeking their opinion and telling them what is expected from them professionally to gain a competitive edge.”

There is the obvious catch when you are so dangerously prone to living on the edge. The competition with British Airways was a serious drain on Virgin Atlantic’s finances. Richard Branson had to sell off Virgin Records, one of his most cherished ventures; for $1 billion to Thorn EMI, so that the proceeds could be invested in Virgin Atlantic. Perhaps the greatest debacle has been Virgin Cola, which was slated to compete with the likes of Coca Cola and Pepsi. The same was the fate of Virgin Clothes, and a lot of other businesses like Virgin Wine, Virgin Money, Virgin Vision, Virgin Vodka, Virgin Vie, Virgin Jeans and Virgin Brides failed to live up to expectations. He will also be exiting the railway business in UK by the end of 2012. Amidst these failures, Branson has defiantly stuck to his core philosophy with any new venture, which is, “S**w it! Just do it!” One of his key role models was a guy who failed (Freddie Laker, who was unable to dislodge British Airways with his low cost transatlantic airline). That says a lot.

However, he also believes that risks should be calculated ones and one must take care of the downside. For instance, when he started Virgin Atlantic, he bought a second hand plane from Boeing and kept the option of returning it if the business did not succeed. This way, he would only lose around six months of Virgin Records profits. He comments to my team on risk taking, “An entrepreneur is expected to keep tabs on the daily occurrences and changes in the industry where he functions. This is, so that it allows him to minimize risks involved in a future course of action, make higher profits than otherwise and make his company a tough competitor to beat.” Also, the group businesses are managed so that even if any business fails, it does not affect the others severely.

Ultimately, like all truly successful entrepreneurs, Branson believes that a line has to be drawn on wealth creation and the ultimate aim is to give back. On Mallya’s continuing problems, he recently told a leading Indian TV channel that rather than being criticised, Mallya should be credited for all the efforts he is making to rescue the airline and that perhaps he (Mallya) was ahead of his time in the Indian market. But most notably, Branson pointed out that flamboyance might be one thing that Mallya would regret. He feels that entrepreneurs must earn respect for what they do for society and not necessarily for their material possessions. In fact, a major portion of Branson’s time and energy goes into philanthropic ventures. He is a trustee at a number of foundations and he decided to pool the energies of Virgin’s charitable foundations globally in 2004 towards the Virgin Unite initiative, which is aimed at tackling global problems like AIDS, TB and Malaria. He has also been active in global policy circles on the war against drugs, which he feels should focus on rehabilitation rather than prohibition.

Be it with adventure trips in a hot air balloon, investments in space travel or anti-AIDS programmes in South Africa, Branson’s life personifies one over arching message. A true entrepreneur should always be ready and willing to take up new & challenging ventures and move beyond his comfort zone to create circumstances to be able to take it up successfully (and manage the downside risk). And once you find a person who is more capable than you to take the business ahead, you should drop it like a hot potato and move on to the next exciting business prospect demanding your attention.