Article

Emerging Market Bidder Returns and the Choice of Payment Method in M&A: Evidence from India

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Abstract

Indian mergers and acquisition deals present an interesting venue to study the effects of two conflicting forces, namely, high promoter holdings and lack of debt funding, on the method of payment choice and its impact on shareholder returns. We study the short run effects on shareholders’ wealth of the acquiring companies in mergers and acquisitions in India. Analysis of abnormal returns indicates that the M&A announcements in India display positive effects on shareholder wealth, oftentimes irrespective of the method of payment. Cash deals display positive abnormal returns, and in some event windows we observe positive abnormal returns for stock deal bidders, as well. This phenomenon is contrary to the wealth effect predictions of the information asymmetry models. We offer financing constraint hypothesis and ownership hypothesis, along with an alternative hypothesis, i.e., the pseudo cash deals hypothesis to explain this anomaly. The availability of internal funds, insider ownership and size of a deal are important factors that determine the choice of payment method in Indian mergers and acquisitions.

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Chapter
Mergers and acquisitions (M&As) are a specific type of investment and many such transactions are made each year. Recently, the role of emerging capital markets has significantly increased in the M&As market. The growing number of transactions and increasing volumes has generated a lot of research devoted to the effectiveness of M&As. Unfortunately, the conclusions are substantially different. A meta-analysis summarizes the results of previous research and gives an estimation of the explanatory power of one or another determinant included in empirical models considering the diversity among the research. This study determines how different variables affect the performance of M&As deals on average in emerging capital markets. This research is one of the first in this area for emerging capital markets, although there are several studies of developed capital markets, mainly the US market. The study was conducted on a sample of 26 articles about M&AS performance in emerging capital markets. The sample covers articles published from 2003 to 2014. Countries in the selected articles include China, India, Brazil, Russia, Malaysia, South Africa, Argentina, Chile, Slovenia, and Poland. For the analysis, we have chosen the most popular among research determinants of the M&As effectiveness: the method of payment, the size of the acquirer, the deal size, cross-border deals, private target company, ROE, industry relatedness, SOE target (state ownership in the target company), ROA, and the financial leverage of the acquirer. This analysis allows conclusions to be drawn about differences in the explanatory power of different determinants, which has practical application for further research. The strongest drivers of performance for emerging capital markets are method of payment, acquirer size, ROA, and industry relatedness.
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This essay details a model of capital structure and financial equilibrium, developed in order to provide more theoretical information about informational asymmetries, financial structure, and financial intermediation. Although direct information transfer about the abilities of the entrepreneur and/or the quality of the firm is uncertain, one publicly available signal is investment in the project by the entrepreneur. This model demonstrates how a firm's value increases with the share of the firm shared by the entrepreneur, and a firm's financial structure can be related to a project or firm's value. Other models cannot readily account for the presence of financial intermediaries, in part because they do not incorporate the role of asymmetric information -- with this model, financial intermediation (which provides a validation role for the credibility of information and has a means of recouping the cost of information gathering and legitimation) can be interpreted as a response to asymmetric information. Within this model, it is determined that the set of investment projects undertaken coincides with the set that would be undertaken if direct information transfer were possible. (CBS)
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This paper presents empirical test results of alternative hypotheses regarding differences in returns to shareholders of bidding firms that choose different payment methods (cash or securities). The evidence is consistent with the payment method signaling hypothesis, which asserts that when management of the bidding firm believes its own stock to be overvalued (undervalued), securities (cash) will be the preferred payment method. The results are not consistent with either the overpayment hypothesis or the present value/hubris hypothesis. The findings also explain the conflicting results reported in prior work on gains to bidding firms.
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This study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids. The results reveal significant differences in the abnormal returns between common stock exchanges a nd cash offers. The results are independent of the type of takeover b id, i.e., merger or tender offer, and of bid outcomes. These findings supported by analysis of nonconvertible bonds, are attributed mainl y to signaling effects and imply that the inconclusive evidence of ea rlier studies on takeovers may be due to their failure to control for the method of payment. Copyright 1987 by American Finance Association.
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This paper analyzes the relation between takeover gains and the q rations of targets and bidders for a sample of 704 mergers and tender offers over the period 1972-87. Target, bidder, and total returns are larger when targets have low q ratios and bidders have high q ratios. The relation is strengthened after controlling for the characteristics of the offer and the contest. This evidence confirms the results of the work by L. Lang, R. Stulz, and R. A. Walkling (1989) and shows that their findings also hold for mergers and after controlling for other determinants of takeover gains. Copyright 1991 by American Finance Association.
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Like the rest of us, corporate managers have many personal goals and ambitions, only one of which is to get rich. The way they try to run their companies reflects these personal goals. Shareholders, in contrast, deprived of the pleasures of running the company, only care about getting rich from the stock they own. The takeover wave of the 1980s put the managershareholder conflict to a new test. Where other checks on management failed, hostile takeovers could now wrest control from managers who ignored the interests of their shareholders. More so than ever before, fear of such disciplinary takeovers has forced managers to listen to shareholder wishes. But even now, many acquisitions are not of this disciplinary variety. Ironically, making acquisitions is often just the quickest and easiest way for managers to expand the scope of their control by directing the firm's cash flows into new ventures. In this paper, we appraise the acquisition process from the managerial perspective. Has the pressure brought by hostile takeovers effectively restricted non-value-maximizing conduct by managers? Are acquisitions themselves driven by non-value-maximizing behavior on the part of acquiring managers? We conclude with some recommendations for improving the takeover process.
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The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows--more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why diversification programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidation-motivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.
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