Business Groups, Governance, Institutional Frameworks and Cultures: Indian Mergers and Acquisitions A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Vineet Tawani M. Finance (RMIT University, Melbourne) School of Economics, Finance and Marketing College of Business RMIT University April 2017 Declaration I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the thesis is the result of work which has been carried out since the official commencement date of the approved research program; and, any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics procedures and guidelines have been followed. I acknowledge the support I have received for my research through the provision of an Australian Government Research Training Program Scholarship. Vineet Tawani 20th July 2017 ii Acknowledgements Every accomplishment in our lives is great.
However, it is the contribution of the people involved in each accomplishment which is even greater. Here, I acknowldedge the contributions of all those who have participated in this journey, playing varied but critical roles. First and foremost, I would like to thank my supervisors, Prof. Sinclair Davidson and Dr Stuart Thomas whose role as guide throughout this journey is superior to all.
Thinking of them, a distinguished couplet from one of the most revered 15th century Indian poets is quite apt: “Both are present but whom should I pay my respect first – my Guru or my Deity? It must be my Guru for having illuminated my intellects to realize the Almighty.” Kabir (translated in English) Without Prof. Davidson’s unflinching faith, relentless positivity and constant motivation, I would not be writing my acknowledgement today. His astute inputs and cheerful demeanor made the journey seem comfortable. Words will never sufficiently express my deepest gratitude for his unconditional support.
I thank Dr Thomas for his time and energy, and for his help and guidance in achieving major milestones throughout the journey. His prompt and insightful feedback was imperative in finalizing my thesis. Next, I am very thankful to God for giving me the opportunity to undertake the prestigious and rewarding qualification of a PhD, and for blessing me with both the intellect and the spirit to overcome challenges and evolve throughout the process. I am certain that not everyone is lucky enough to have such an opportunity.
I am also thankful to Him for sending so many well-wishers my way. I am truly blessed to have a very supportive group of people around me. And today, I wish to thank all of them. The first person I wish to thank is my wife, Supriya.
Her scarifices are superior to all. My PhD entered its intensive mode during the first year of our marriage and Supriya had to sacrifice the joys of newly-wed bliss. Throughout this entire journey, she shouldered the family responsibilities and always stood strong and steadfast beside me. Her sacrifices, encouragement and patience are unquestionably the foundations upon which this thesis is built.
I am in awe of your strength, Supriya. Thank you so much for being such a strong pillar iii of support and a wonderful wife. I assure you that I shall now endeavour to make up for all our lost time together. I would also like to thank my parents, my siblings and my extended family, including Supriya’s parents and her siblings.
I am blesssed to have lovely families, in which everyone showers blessings, encouragement and is willing to endure all pains to see that everyone progresses. As the PhD journey is rarely smooth, their kind words and gestures uplifted my spirits and contributed significantly in their own way. Further, I would like to thank my friends and colleagues Nirav, Guillermo, Vivek and Parul for their affection, support, guidance and help. They have always expressed an interest in my work, and ensuing discussions with them were fruitful in streamlining my ideas about my reserach.
Next, I would like to mention Kazuhiro and Jasper at Thomson Reuters for their help in organizing my data for the thesis. This thesis is based on Thomson Reuters’ Databases, which are fairly sophisticated and can be overwhelming for beginners. Kazuhiro and Jasper were instrumental in explaining the functions and the critical aspects of these databases. I would also like to extend my gratitude to Sally at http://wordly.au/ for her promptness, meticulousness and professionalism while editing this thesis.
iv Table of Contents Declaration. iii Table of Contents. v List of Figures. ix List of Tables.
1-15 Literature and Hypotheses 2.2 Origin, Motives and Incentives for M&As .3 Do M&As Have Synergies? .1 Returns to Target or Selling Firms’ Shareholders 2-21 2.2 Returns to Acquirer or Buying Firms Shareholders 2-22 2.4 Factors Affecting Takeover Premiums .1 Emerging Market Effects – Indian Business Houses 2-23 2.2 Information Asymmetry – Relatedness Effect 2-29 2.3 Cross-Border M&As – Multidimensional Effects 2-34 2.4 Methods of Payment – Consideration Effect 2-60 2.5 Industry – Diversification Effect 2-61 2.1 Event Study Assumptions 3-64 3.2 Event and Event Date 3-66 3.3 Estimation and Event Period Windows 3-67 3.4 Choice of Models 3-68 3.5 Choice of Index 3-70 3.8 Non-Synchronous Trading 3-71 3.9 Non-Normality of Daily Data 3-71 3.10 Hetroskedasticity – Event Induced Variance 3-72 3.11 Event Clustering - Cross-Sectional Dependence 3-73 3.12 Cross-Sectional Correlation of Estimated Abnormal Returns 3-74 3.14 Impact of Outliers and Leveraged Data-Points 3-74 v 3.15 Analysing and Testing Models 3-75 3.1 Calculating Actual Returns 3-76 3.3 Calculating Expected (Normal) Returns 3-77 3.4 Calculating Abnormal Returns (AR) 3-79 3.5 Aggregation of Abnormal Returns 3-80 3.6 Variance of Abnormal Returns (AR) – Scaling Factor 3-81 3.7 Standardised Abnormal Return (SAR) 3-82 3.8 Cumulative Standardised Abnormal Returns (SCARs) 3-82 3.9 Statistical Tests for Significance of ARs 3-82 3.10 Statistical Tests for Significance of CAARs 3-83 3.11 Cross Sectional Regression Analysis 3-83 3.2 Market Model Analysis – Targets .1 OLS MM M Comparison 5-110 5.3 Fama-French (FF) Analysis – Targets .1 OLS MM M Comparison 5-114 5.2 Fama-French (FF) vs.4 Scholes and Williams Analysis – Targets .5 Equally Weighted Index - Targets.7 Market Model Analysis – Acquirers .1 OLS MM M Comparison 5-124 5.8 Fama-French Analysis - Acquirers .1 OLS MM M Comparison 5-128 5.2 Fama-French (FF) vs.9 Scholes and Williams Analysis – Acquirers .10 Equally Weighted Index – Acquirers .12 Cross-Sectional Analysis .1 Indian Target Firms 5-137 5.2 Indian Acquirer Firms 5-141 vi 5.1 Impact of Various Financial Models 5-144 5.2 Impact of Various Regression Techniques 5-145 5.3 Impact of Indices 5-146 5.4 Cross-Sectional Analysis 5-147 5.5 Snapshot – Hypothesis 5-147 Domestic Deals 6.2 Returns to Domestic Targets. Fama-French (FF) Model 6-152 6.2 Market & Scholes and Williams (SW) Adjusted Betas 6-156 6.3 Business Group Acquirers and Domestic Targets .1 MM Estimation Analysis 6-157 6.2 OLS Estimation Analysis 6-158 6. Fama-French Returns 6-161 6.4 Related Firms and Domestic Targets .1 MM Estimation Analysis 6-162 6.2 OLS Estimation Analysis 6-163 6. Fama-French Returns 6-165 6.5 Summary - Returns to Targets .6 Returns to Domestic Acquirers.
Fama-French (FF) Model 6-169 6. Scholes and Williams 6-172 6.7 Business Group Acquirers .1 MM Estimation Analysis 6-173 6.2 OLS Estimation Analysis 6-174 6. Fama-French (FF) Returns 6-176 6.8 Relatedness and Domestic Acquirers .1 MM Estimation Analysis 6-177 6.2 OLS Estimation Analysis 6-178 6. Fama-French Returns 6-180 6.9 Summary - Returns to Acquirers .10 Cross-Sectional Analysis .1 Domestic Target Firms 6-183 6.2 Domestic Acquirer Firms 6-188 6.1 Abnormal Returns - Synergy 6-192 6.4 Cross-Sectional Analysis 6-193 6.5 Snapshot – Hypotheses 6-194 Cross-Border Deals 7.2 Returns to Indian Targets.
Fama-French (FF) Model 7–198 7. Scholes and Williams (SW) Betas 7–202 7.3 Corporate Governance Analysis .1 MM Estimation Analysis 7–203 7.2 OLS Estimation Analysis 7–204 7.3 Corporate Governance Analysis Snapshot 7–205 7. Fama-French Returns 7–206 7.5 Corporate Governance Models and Political Framework 7–207 7.1 MM Estimation Analysis 7–211 7.2 OLS Estimations Analysis 7–213 7.3 Cultural Analysis Snapshot 7–215 7. Fama-French Returns 7–219 7.5 Institutional Environment Analysis .1 MM Estimation Analysis 7–220 7.2 Market Model OLS Estimations 7–221 7.3 Institutional Framework Analysis Snapshot 7–222 7.
Fama-French Returns 7–223 7.6 Summary - Returns to Targets .7 Returns to Indian Acquirers. Fama-French (FF) Model 7–226 7. Scholes and Williams (SW) Adjusted Betas 7–228 7.8 Summary Returns to Acquirers .9 Cross-Sectional Analysis .1 Indian Target Firms 7–231 7.2 Indian Acquirer Firms 7–237 7. Cross-Border M&As .1 Return to Target Firms 7-245 7.2 Returns to Acquirer Firms 7-247 7.1 Abnormal Returns - Synergy 7-252 7.2 Corporate Governance Effect 7-252 7.3 Cultural Proximity Effect 7-253 7.4 Institutional Framework Effect 7-254 7.5 Snapshot - Hypotheses 7-255 Conclusion 8.3 Research Limitation and Proposed Future Work .7–138 viii List of Figures Figure 1.1 FDI – Inflows into India .2 Multidimensional Characteristics of India .2 Role of Information Asymmetry in Takeover Premiums .3 Distance Factors in CBMAs .4 Political View of CG Models .5 Cultural Clusters Adopted from the GLOBE Study .6 Relationship between Various Distance Factors .7 The Multidimensional Aspects of India .1 Graphical Representation of Event Study Time Frame .1 Fama-French Factor Annualized Daily Returns Over a 20 Year Period .3 Event Study Window Sizes .4 Breakdown: Vanishing Companies and Insufficient Data .1 Breakdown of All the Targets for All the Deals .1 Market Model Returns; MM vs.
OLS; All & Same-firms; VWI.2 Market Model Returns; M vs.1 FF-Model Returns; MM vs. OLS; All & Same-Firms; VWI. FF Returns; OLS vs.1 Returns to Targets; VWI vs. EWI; OLS vs.1 Market Model Returns; MM vs.
OLS; All & Same-Firms; VWI .2 Market Model Returns; M vs.1 Returns from FF Model; MM vs. OLS; All & Same-Firms; VWI. Market; OLS vs.1 Returns from Market and SW (1-3) Models OLS (All-Firms) .2 Market and SW model variants comparison (All-firms) .1 Returns to Acquirers; VWI vs. EWI; OLS vs.1 Market Returns; DMA - Targets – OLS vs.2 Returns to Domestic Target; Market vs.
FF; OLS vs.3 Returns from the Market and SW (1-3) Models; OLS (All & Same-Firms) .1 Domestic Targets and Business Group Analysis (MM) .2 Domestic Targets and Business Group Analysis (OLS All-Firms) .1 Domestic Targets and Relatedness Analysis (MM All-Firms) .2 Domestic Targets and Relatedness Analysis (OLS All-Firms) .1 Market Returns to Domestic Targets – OLS vs.2 Returns to Domestic Acquirers; Market vs. FF; OLS vs MM (All & Same-Firms) 6-169 Figure 6.3 Returns from the Market and SW (1-3) Models; OLS (All & Same-Firms) .1 Domestic Acquirers and Business Group Analysis (MM) .2 Domestic Acquirers and Business Group Analysis (OLS All-Firms) .1 Domestic Acquirers and Relatedness Analysis (MM – All-Firms) .2 Domestic Acquirers and Relatedness Analysis (OLS – All-Firms).1 The Multidimensional Aspects of India .1 Market Returns to CBMA Targets - OLS vs.2 Returns to CB Targets; Market vs. FF; OLS vs.3 Returns from the Market and SW (1-3) Models; OLS (All & Same-Firms) .1 Indian Targets and Corporate Governance Analysis (MM) .2 Indian Targets and Corporate Governance Analysis (OLS) .3 Country Specific Returns to Indian Targets (MM) .1 Country Clusters According to the GLOBE Study .2 Market Returns; Indian Targets; Multiple Clusters - I; (MM) .3 Market Returns; Indian Targets; Multiple Clusters - II; (MM) .4 Market Returns; Indian Targets; Multiple Clusters - I; (OLS) .5 Market Returns; Indian Targets; Multiple Clusters - II; (OLS) .6 Cultural Analysis Snapshot .1 Indian Targets; Institutional Analysis; All-Firms (MM) .2 Indian Targets; Institutional Analysis; All-Firms (OLS) .1 Returns to CB Acquirers - OLS vs.2 Returns to CB Acquirers; Market vs. FF; OLS vs MM (All & Same-Firms) .3 Returns from the Market and SW (1-3) Models; OLS (All & Same-Firms).
CBMA Indian Target Firms (MM). CBMA Indian Target Firms (OLS). CBMA Indian Acquirer Firms (MM). CBMA Indian Acquirer Firms (OLS).1 Return to Foreign Targets; MM vs.2 Return to Foreign Acquirers; MM vs.3 CG-Analysis Foreign Acquirers; MM .4 CG-Analysis Foreign Acquirers; OLS.
7-251 x List of Tables Table 2.1 Patterns of Gains Related to Takeover Theories .