Volume 19, Number 1 Article by B Rajesh Kumar and Prabina Rajib March, 2007
An Analytical Study on Multiple Mergers in India :
Mergers, acquisitions, and corporate control have emerged as a major force in the modern financial environment and have been the subject of study in the literature, largely in the western context. In an attempt to fill the gap in such studies in the Indian context, particularly with reference to multiple mergers, Rajesh Kumar and Prabina Rajib analysed the financial characteristics of fifty-three firms involved in multiple (more than three) mergers between 1993 and 2002, based on industry sectors. The control groups were matched on the basis of industry sector and sales in the earliest year of initiation of merger activity.
The study found that the average sales, profits and cash flow for a period of ten years were higher for the merger firms as compared to a control group matched by industry and size. A logit model was applied to measure the probability of acquisition as a function of the financial characteristics of the multiple merger acquirer firms. The study finds evidence which is consistent with the market power and size hypothesis of merger theories.
The results indicate that low financial leverage and unused debt capacity appear to be motives for firms to use multiple mergers as a strategic business tool. Thus a firm’s capital structure appears as an especially important variable in the decision to become a multiple merger acquirer. The results suggest that mergers are used to maximise the size of firms to revitalise the bidding companies. Firms with low debt levels and free cash flows may also incur agency costs by investing in multiple merger activity. Multiple mergers could also become a tool to increase the management’s efficiency in producing sales per value of assets. Firms whose main shareholder power is not strong are more likely to involve in multiple mergers.
Reprint No 07101