Corporate Mergers and Acquisitions in India

Abstract

This article estimates two models for the takeover selection process in India by identifying discriminating variables that help delineate bidder and target firms. Both discriminant analysis and logit regression have been used for the purpose of developing the appropriate frameworks based on sample data of companies involved in a merger, acquisition or takeover during the period 2002 to 2005. Variables tested were measures of leverage, size, liquidity, profitability, growth, operating efficiency, retention, return on equity and risk. Both the techniques identified liquidity, profitability, size, risk and growth as the most significant discriminating variables. Results indicated that targets have higher liquidity, growth and size on one hand and lower risk, leverage, profitability and operating efficiency on the other. These results appear rational and support the theory that takeovers are a market share enhancing mechanism. Synergy gains through economies of scale or scope, reducing cost of capital or increasing debt capacity could be other driving factors. The discriminant model correctly classifies bidder and target firms to the tune of 64.8 per cent and has been applied to holdout sample for the year 2006 for verifying its predictive power. The logit model appears to be a better fit for bidders with a prediction accuracy of 99.1 per cent, which increases to 100 per cent for the holdout set. In case of targets, prediction accuracy increases from 8.9 per cent to more than 23 per cent over the two data sets. Both models yield similar results as both formulations display the same relationships for the independent variables with the dependent and also find current ratio as being the most important variable. Owing to the moderate degree of success of the model, it is recommended that any of the models could be used for screening companies for takeovers while other tools and methodologies could be developed to facilitate further research and enable decision-making.