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Why Do Firms Merge/Acquire

Volume 19, Number 4 Article by R Srinivasan and Bibek Prasad Mishra December, 2007

Why Do Firms Merge/Acquire: An Analysis of Strategic Intent in Recent M&A Activity among Indian Firms :

Research has classified merger and acquisition (M&A) intents of firms into five major theories – efficiency theories, information theories, agency theories, market power, and tax advantages. Empirical work on the strategic intent behind M&A is scarce. In this paper, Srinivasan and Mishra focus on the motives of mergers and acquisitions in Indian firms. Data on the intent behind mergers and acquisitions of both acquiring firms and target firms were derived from the statements made by the top management of the firms in popular and business media (print and internet sources) in the case of 30 M&A deals made in the period 2001-2005 (deal size of at least Rs 250 million) involving at least one Indian firm. Based on a content analysis of these intents, a number of propositions are generated on why firms undertake M&A activity as a means of inorganic growth.

While developing propositions, the firms were grouped as market leaders, other profit making companies, and loss making units. The propositions suggest that horizontal acquisitions are made to retain or achieve market leadership; that sell offs are motivated by market entry strategy and access to funds, or to wipe out accumulated losses; that market entry strategy being a dominant motive for MNC firms acquiring domestic firms, the premium paid to acquire such companies is high; and that complementarity of intent between acquirers and targets is important in order to leverage the synergies. The propositions developed in this research could be tested over larger sample sizes and temporally validated after three to five financial years, which could pave the way for a more detailed understanding of the corporate strategies of Indian firms. Study of the target firms’ intents would help acquiring firm managers in their post-merger integration efforts.

Reprint No 07404