Payment Methods and Shareholders’ Gains in Mergers and Acquisitions: An Empirical Investigation into Indian Companies

Abstract

Purpose
Mergers and Acquisitions (M&A) are an essential corporate growth strategy to survive in this competitive world. The primary objective of this study is to examine the determinants of the payment methods (cash, stock, mixed) of M&A and also to find out the impact of the M&A announcement on the short-term stock performance of the Indian non-financial acquirer companies. This study aims to identify the trends of payment methods of M&A used by companies from top ten M&A leading countries with special attention to India. The study observes the short-term stock performance of the Indian acquiring companies due to the announcement of different payment methods in M&A deals. The study investigates the Indian acquiring company’s stock performance due to the announcement of different types of deals as per the listing status of the target firm, industry relatedness and the acquired stake in M&A deals.

Methodology
To carry out this empirical study, secondary data relating to M&A deals were collected from Bloomberg database, Centre for Monitoring Indian Economy (CMIE) Prowess IQ Database and information relating to stock price was collected from Bombay Stock Exchange (BSE) website. The study covers the M&A deals that are announced by acquirer from the non-financial sector in India from April 1, 2000 to March 31, 2017 for the empirical analysis. To achieve different objectives, different statistical tools and techniques such as histogram, pie chart, descriptive statistics, independent sample t-test and logistic regression were used. Event study methodology was applied based on the market model with a different event window to investigate the stock returns during the M&A announcement period. Parametric test (Patell z) and a non-parametric test (sign test) were used to check the robustness of the results.

Findings
The results of the study indicate that the payment methods of M&A deal in non-financial companies are significantly affected by the characteristics of acquirer, target, and deal respectively. It is found that there is a positive relationship between the acquirer’s cash availability, percentage of promoter holdings in acquirer company and acquirer’s collateral with cash as a mode of payment in Indian M&A deals. It also appears that the determinants like deal value, acquirer’s leverage, target firm’s listing on the stock exchange and target industry relatedness are negatively related to M&A deals done with the cash payment method. The results also specify that Indian acquirers’ stock returns are positively higher in the pre-announcement period for cash and mixed payment methods deals than stock payment method. The result also shows that in the stock payment method, the stock returns are negative in various window periods across the announcement day. The cumulative average abnormal return is higher in case acquirer and target are in the same industry than unrelated industry. The acquirer earns more stock returns in case of complete stake acquisitions of the target than majority stake acquisitions. The study also shows that the acquisition of unlisted targets creates higher announcement-period returns than the acquisition of listed targets.

Implications
The knowledge gained from this study will help managers from both acquirer and target companies for selection of appropriate payment method in different corporate situations and improve their investment mechanism and strengthen their finances by value creation in M&A. Therefore, this can optimise their cost of capital in both pre and post-acquisition period. This study also helpful for the shareholders and short-term investors to generate wealth during the M&A announcement.

Originality
Most of the studies relating to determinants of payment methods and shareholders’ gains in M&A have concentrated mainly developed countries. Briefly examining the determinants of payment methods and validating the payment methods hypothesis in an emerging market like India, by taking large sample period is an original move in this study. The study adds to the existing literature by evaluating the impact of various important factors of M&A; such as payment methods, industry relatedness, listing status of the target firm and the percentage of stake acquired on the short-term stock performance of Indian acquirer.