Doctoral thesis of philosophy business groups, governance, institutional frameworks and cultures indian mergers and acquisitions

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 Com, 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.com.au/ for her promptness, meticulousness and professionalism while editing this thesis iv Table of Contents Declaration ii Acknowledgements iii Table of Contents v List of Figures ix List of Tables xi Abstract Introduction 1.1 Motivation 1-5 1.2 Research Contribution 1-8 1.2.1 Contextual Contribution 1-8 1.2.2 Methodological Contribution 1-14 1.3 Thesis Outline 1-15 Literature and Hypotheses 2.1 Introduction 2-16 2.2 Origin, Motives and Incentives for M&As 2-16 2.3 Do M&As Have Synergies? 2-21 2.3.1 Returns to Target or Selling Firms’ Shareholders 2-21 2.3.2 Returns to Acquirer or Buying Firms Shareholders 2-22 2.4 Factors Affecting Takeover Premiums 2-23 2.4.1 Emerging Market Effects – Indian Business Houses 2-23 2.4.2 Information Asymmetry – Relatedness Effect 2-29 2.4.3 Cross-Border M&As – Multidimensional Effects 2-34 2.4.4 Methods of Payment – Consideration Effect 2-60 2.4.5 Industry – Diversification Effect 2-61 2.5 Overall Summary 2-61 Methodology 3.1 Introduction 3-63 3.2 Fundamentals 3-64 3.2.1 Event Study Assumptions 3-64 3.2.2 Event and Event Date 3-66 3.2.3 Estimation and Event Period Windows 3-67 3.2.4 Choice of Models 3-68 3.2.5 Choice of Index 3-70 3.2.6 Data Frequency 3-70 3.2.7 Sample Size 3-71 3.2.8 Non-Synchronous Trading 3-71 3.2.9 Non-Normality of Daily Data 3-71 3.2.10 Hetroskedasticity – Event Induced Variance 3-72 3.2.11 Event Clustering - Cross-Sectional Dependence 3-73 3.2.12 Cross-Sectional Correlation of Estimated Abnormal Returns 3-74 3.2.13 Autocorrelation 3-74 3.2.14 Impact of Outliers and Leveraged Data-Points 3-74 v 3.2.15 Analysing and Testing Models 3-75 3.3 Implementation 3-76 3.3.1 Calculating Actual Returns 3-76 3.3.2 Regression Techniques 3-77 3.3.3 Calculating Expected (Normal) Returns 3-77 3.3.4 Calculating Abnormal Returns (AR) 3-79 3.3.5 Aggregation of Abnormal Returns 3-80 3.3.6 Variance of Abnormal Returns (AR) – Scaling Factor 3-81 3.3.7 Standardised Abnormal Return (SAR) 3-82 3.3.8 Cumulative Standardised Abnormal Returns (SCARs) 3-82 3.3.9 Statistical Tests for Significance of ARs 3-82 3.3.10 Statistical Tests for Significance of CAARs 3-83 3.3.11 Cross Sectional Regression Analysis 3-83 3.4 Overall Summary 3-86 Sample Data 4.1 Introduction 4-88 4.2 Data Section 4-88 4.2.1 Data Sources 4-88 4.2.2 Dataset Structures 4-90 4.2.3 Data Screening 4-91 4.3 Data Description 4-97 4.3.1 Data Issues 4-100 4.4 Overall Summary 4-101 Aggregate Deals 5.1 Introduction 5-103 5.2 Market Model Analysis – Targets 5-106 5.2.1 OLS MM M Comparison 5-110 5.3 Fama-French (FF) Analysis – Targets 5-111 5.3.1 OLS MM M Comparison 5-114 5.3.2 Fama-French (FF) vs Market Model 5-115 5.4 Scholes and Williams Analysis – Targets 5-117 5.5 Equally Weighted Index - Targets 5-118 5.5.1 SW vs Market Model 5-119 5.6 Summary - Targets 5-121 5.7 Market Model Analysis – Acquirers 5-122 5.7.1 OLS MM M Comparison 5-124 5.8 Fama-French Analysis - Acquirers 5-125 5.8.1 OLS MM M Comparison 5-128 5.8.2 Fama-French (FF) vs Market Model 5-129 5.9 Scholes and Williams Analysis – Acquirers 5-130 5.10 Equally Weighted Index – Acquirers 5-132 5.10.1 SW vs Market Model 5-133 5.11 Summary – Acquirers 5-135 5.12 Cross-Sectional Analysis 5-136 5.12.1 Indian Target Firms 5-137 5.12.2 Indian Acquirer Firms 5-141 vi 5.13 Overall Summary 5-144 5.13.1 Impact of Various Financial Models 5-144 5.13.2 Impact of Various Regression Techniques 5-145 5.13.3 Impact of Indices 5-146 5.13.4 Cross-Sectional Analysis 5-147 5.13.5 Snapshot – Hypothesis 5-147 Domestic Deals 6.1 Introduction 6-148 6.2 Returns to Domestic Targets 6-151 6.2.1 Market vs Fama-French (FF) Model 6-152 6.2.2 Market & Scholes and Williams (SW) Adjusted Betas 6-156 6.3 Business Group Acquirers and Domestic Targets 6-157 6.3.1 MM Estimation Analysis 6-157 6.3.2 OLS Estimation Analysis 6-158 6.3.3 Market vs Fama-French Returns 6-161 6.4 Related Firms and Domestic Targets 6-162 6.4.1 MM Estimation Analysis 6-162 6.4.2 OLS Estimation Analysis 6-163 6.4.3 Market vs Fama-French Returns 6-165 6.5 Summary - Returns to Targets 6-167 6.6 Returns to Domestic Acquirers 6-168 6.6.1 Market vs Fama-French (FF) Model 6-169 6.6.2 Market vs Scholes and Williams 6-172 6.7 Business Group Acquirers 6-173 6.7.1 MM Estimation Analysis 6-173 6.7.2 OLS Estimation Analysis 6-174 6.7.3 Market vs Fama-French (FF) Returns 6-176 6.8 Relatedness and Domestic Acquirers 6-177 6.8.1 MM Estimation Analysis 6-177 6.8.2 OLS Estimation Analysis 6-178 6.8.3 Market vs Fama-French Returns 6-180 6.9 Summary - Returns to Acquirers 6-181 6.10 Cross-Sectional Analysis 6-182 6.10.1 Domestic Target Firms 6-183 6.10.2 Domestic Acquirer Firms 6-188 6.11 Overall Summary 6-192 6.11.1 Abnormal Returns - Synergy 6-192 6.11.2 IBG Effects 6-192 6.11.3 Relatedness Effects 6-193 6.11.4 Cross-Sectional Analysis 6-193 6.11.5 Snapshot – Hypotheses 6-194 Cross-Border Deals 7.1 Introduction 7–195 7.2 Returns to Indian Targets 7–197 7.2.1 Market vs Fama-French (FF) Model 7–198 7.2.2 Market vs Scholes and Williams (SW) Betas 7–202 7.3 Corporate Governance Analysis .7–203 vii 7.3.1 MM Estimation Analysis 7–203 7.3.2 OLS Estimation Analysis 7–204 7.3.3 Corporate Governance Analysis Snapshot 7–205 7.3.4 Market vs Fama-French Returns 7–206 7.3.5 Corporate Governance Models and Political Framework 7–207 7.4 Cultural Analysis .7–211 7.4.1 MM Estimation Analysis 7–211 7.4.2 OLS Estimations Analysis 7–213 7.4.3 Cultural Analysis Snapshot 7–215 7.4.4 Market vs Fama-French Returns 7–219 7.5 Institutional Environment Analysis 7–220 7.5.1 MM Estimation Analysis 7–220 7.5.2 Market Model OLS Estimations 7–221 7.5.3 Institutional Framework Analysis Snapshot 7–222 7.5.4 Market vs Fama-French Returns 7–223 7.6 Summary - Returns to Targets 7–224 7.7 Returns to Indian Acquirers .7–225 7.7.1 Market vs Fama-French (FF) Model 7–226 7.7.2 Market vs Scholes and Williams (SW) Adjusted Betas 7–228 7.8 Summary Returns to Acquirers .7–229 7.9 Cross-Sectional Analysis 7–230 7.9.1 Indian Target Firms 7–231 7.9.2 Indian Acquirer Firms 7–237 7.9.3 Summary 7-244 7.10 Domestic vs Cross-Border M&As 7-245 7.10.1 Return to Target Firms 7-245 7.10.2 Returns to Acquirer Firms 7-247 7.11 Foreign Firms 7-249 7.12 Overall Summary 7-252 7.12.1 Abnormal Returns - Synergy 7-252 7.12.2 Corporate Governance Effect 7-252 7.12.3 Cultural Proximity Effect 7-253 7.12.4 Institutional Framework Effect 7-254 7.12.5 Snapshot - Hypotheses 7-255 Conclusion 8.1 8.2 8.3 8.4 Introduction 8-256 Recapitulation 8-256 Research Limitation and Proposed Future Work 8-264 Overall Summary 8-265 References Appendix 5-1 6-55 7–138 viii List of Figures Figure 1.2.1 FDI – Inflows into India 1-11 Figure 1.2.2 Multidimensional Characteristics of India 1-12 Figure 2.4.1 Pyramid Structure 2-24 Figure 2.4.2 Role of Information Asymmetry in Takeover Premiums 2-33 Figure 2.4.3 Distance Factors in CBMAs 2-39 Figure 2.4.4 Political View of CG Models 2-44 Figure 2.4.5 Cultural Clusters Adopted from the GLOBE Study 2-49 Figure 2.4.6 Relationship between Various Distance Factors 2-54 Figure 2.4.7 The Multidimensional Aspects of India 2-59 Figure 3.2.1 Graphical Representation of Event Study Time Frame 3-67 Figure 4.2.1 Fama-French Factor Annualized Daily Returns Over a 20 Year Period 4-90 Figure 4.2.2 Data Structures 4-91 Figure 4.2.3 Event Study Window Sizes 4-92 Figure 4.2.4 Breakdown: Vanishing Companies and Insufficient Data 4-96 Figure 4.3.1 Breakdown of All the Targets for All the Deals 4-101 Figure 5.2.1 Market Model Returns; MM vs OLS; All & Same-firms; VWI 5-106 Figure 5.2.2 Market Model Returns; M vs Others (Same-firms); VWI 5-110 Figure 5.3.1 FF-Model Returns; MM vs OLS; All & Same-Firms; VWI 5-112 Figure 5.3.2 Market vs FF Returns; OLS vs MM Regressions (Same-Firms) 5-115 Figure 5.4.1 Market vs SW (1-3) Models Return; OLS (All-firms); VWI 5-117 Figure 5.5.1 Returns to Targets; VWI vs EWI; OLS vs MM (Same-Firms) 5-118 Figure 5.5.2 Market (VWI) vs SW (1-3) (EWI) OLS (Same-Firms) 5-120 Figure 5.7.1 Market Model Returns; MM vs OLS; All & Same-Firms; VWI 5-122 Figure 5.7.2 Market Model Returns; M vs Others (Same-Firms); VWI 5-125 Figure 5.8.1 Returns from FF Model; MM vs OLS; All & Same-Firms; VWI 5-126 Figure 5.8.2 FF vs Market; OLS vs MM Regressions (Same-Firms) 5-129 Figure 5.9.1 Returns from Market and SW (1-3) Models OLS (All-Firms) 5-131 Figure 5.9.2 Market and SW model variants comparison (All-firms) 5-131 Figure 5.10.1 Returns to Acquirers; VWI vs EWI; OLS vs MM (Same-Firms) 5-132 Figure 5.10.2 Market (VWI) vs SW (1-3) (EWI); OLS (Same-Firms) 5-134 Figure 6.2.1 Market Returns; DMA - Targets – OLS vs MM; (All & Same) 6-151 Figure 6.2.2 Returns to Domestic Target; Market vs FF; OLS vs MM (All & Same-Firms) 6-152 Figure 6.2.3 Returns from the Market and SW (1-3) Models; OLS (All & Same-Firms) 6-156 Figure 6.3.1 Domestic Targets and Business Group Analysis (MM) 6-157 Figure 6.3.2 Domestic Targets and Business Group Analysis (OLS All-Firms) 6-158 Figure 6.4.1 Domestic Targets and Relatedness Analysis (MM All-Firms) 6-162 Figure 6.4.2 Domestic Targets and Relatedness Analysis (OLS All-Firms) 6-163 Figure 6.6.1 Market Returns to Domestic Targets – OLS vs MM 6-168 Figure 6.6.2 Returns to Domestic Acquirers; Market vs FF; OLS vs MM (All & Same-Firms) 6-169 Figure 6.6.3 Returns from the Market and SW (1-3) Models; OLS (All & Same-Firms) 6-172 Figure 6.7.1 Domestic Acquirers and Business Group Analysis (MM) 6-173 Figure 6.7.2 Domestic Acquirers and Business Group Analysis (OLS All-Firms) 6-174 Figure 6.8.1 Domestic Acquirers and Relatedness Analysis (MM – All-Firms) 6-177 Figure 6.8.2 Domestic Acquirers and Relatedness Analysis (OLS – All-Firms) 6-178 Figure 7.1.1 The Multidimensional Aspects of India .7–196 Figure 7.2.1 Market Returns to CBMA Targets - OLS vs MM .7–198 Figure 7.2.2 Returns to CB Targets; Market vs FF; OLS vs MM (All & Same-Firms) 7–199 Figure 7.2.3 Returns from the Market and SW (1-3) Models; OLS (All & Same-Firms) 7–202 Figure 7.3.1 Indian Targets and Corporate Governance Analysis (MM) 7–203 Figure 7.3.2 Indian Targets and Corporate Governance Analysis (OLS) .7–204 Figure 7.3.3 Country Specific Returns to Indian Targets (MM) 7–208 Figure 7.3.4 Blockholding vs Diffused Ownership (MM) .7–210 Figure 7.4.1 Country Clusters According to the GLOBE Study 7–211 Figure 7.4.2 Market Returns; Indian Targets; Multiple Clusters - I; (MM) 7–212 Figure 7.4.3 Market Returns; Indian Targets; Multiple Clusters - II; (MM) 7–213 Figure 7.4.4 Market Returns; Indian Targets; Multiple Clusters - I; (OLS) .7–214 Figure 7.4.5 Market Returns; Indian Targets; Multiple Clusters - II; (OLS) 7–215 ix Figure 7.4.6 Cultural Analysis Snapshot 7–217 Figure 7.5.1 Indian Targets; Institutional Analysis; All-Firms (MM) 7–220 Figure 7.5.2 Indian Targets; Institutional Analysis; All-Firms (OLS) 7–221 Figure 7.7.1 Returns to CB Acquirers - OLS vs MM .7–225 Figure 7.7.2 Returns to CB Acquirers; Market vs FF; OLS vs MM (All & Same-Firms) 7–226 Figure 7.7.3 Returns from the Market and SW (1-3) Models; OLS (All & Same-Firms) 7–228 Figure 7.10.1 DMA vs CBMA Indian Target Firms (MM) 7-245 Figure 7.10.2 DMA vs CBMA Indian Target Firms (OLS) 7-245 Figure 7.10.3 DMA vs CBMA Indian Acquirer Firms (MM) 7-247 Figure 7.10.4 DMA vs CBMA Indian Acquirer Firms (OLS) 7-248 Figure 7.11.1 Return to Foreign Targets; MM vs OLS 7-249 Figure 7.11.2 Return to Foreign Acquirers; MM vs OLS 7-250 Figure 7.11.3 CG-Analysis Foreign Acquirers; MM 7-251 Figure 7.11.4 CG-Analysis Foreign Acquirers; OLS 7-251 x Table-A 7.50 Univariate Regression Analysis; OLS CAARs [-10,+10] - Indian Targets CAAR Window: GJ (1) [-10,+10] (2) [-10,+10] (3) [-10,+10] (4) [-10,+10] (5) [-10,+10] 0.0522 (1.4131) Blockhold (7) [-10,+10] (8) [-10,+10] 0.0674 * (1.7460) 0.0843 ** (2.2205) Cash 0.1004 *** (2.6589) 0.0817 ** (2.1078) CWA 0.0258 (0.4930) Pct50 0.0063 (0.1484) PctToe Intercept (6) [-10,+10] 0.1332 (1.6345) 0.0468 * (1.7977) 0.0395 * (1.6820) 0.0508 * (1.9722) Observations F-Statistics 100 1.9969 101 4.9305 104 4.4426 p-value 0.1608 0.0287 ** 0.0375 ** Adj R-Squared 0.0097 0.0384 0.0324 0.0830 *** (3.8530) 104 0.2430 0.0850 *** (3.5705) 0.0590 ** (2.2132) 0.0668 * (1.7555) 0.0847 ** (2.0942) 0.0846 (1.3587) 0.0854 (1.4148) -0.0184 (-0.4996) 0.0048 (0.1171) 0.1253 (1.6196) 0.0889 (1.1194) -0.0268 (-0.6542) -0.0416 (-1.0880) 104 0.0220 103 2.6715 99 2.4182 100 2.9715 0.6231 0.8823 0.1053 0.0415 ** 0.0155 ** -0.0076 -0.0096 0.0159 0.0767 0.1002 t statistics in parentheses; * p