M&As in good-times v/s M&As in recession: A study

Abstract

There has been a substantial amount of work done in the research arena to investigate the reason why mergers and acquisitions occur. Among the many proposed reasons are efficiency-related reasons that often involve expansion for economies of scale or other “synergies”, attempts to create market power by forming monopolies or oligopolies, market discipline, as in the case of the removal of incompetent target management, self-serving attempts by acquirer management to “over-expand” and other agency costs, and to take advantage of opportunities for diversification, like by exploiting internal capital markets and managing risk for undiversified managers.1 There have also been studies to observe patterns in the timings of the M&A’s. In the last century, since the 1900s, the global corporate sector has seen to five merger waves each caused by different reasons. If the first merger wave (1898-1902) saw the creation of monopolies, the second (1926-30) witnessed the formation of oligopolies, while the third (1960s) marked the age of the conglomerates, the fourth (late 1980s) was about core competence and focus. Though the current wave of mergers (since the early 1990s) has been because of all driving forces of change, the key factors have been economies of scale and scope, technological revolution and regulatory reform. In Indian context, there has been a recent spate of M&As. A few prominent ones were Tata-JLR deal, Daiichi Sankyo-Ranbaxy deal, Tata Teleservices-NTT DoCoMo deal etc. During the recessionary times, due to lack of liquidity and the subsequent continuous struggle to stay afloat, on the face of it, one would expect to see fewer mergers and acquisitions for expansionary/ capability acquisition reasons. On the contrary, we have witnessed a flurry of activities in the space. 2 The intent of this study is to analyze the deals that have happened in the past (cross-border Indian deals) after classifying them as deals done during Boom, Slowdown, Recession & Recovery and identify if there are any patterns inherent in the two types of deals on the basis of parameters such as deal size or the premiums paid, types of industries involved etc. Provided any pattern exists, reasons or theories as to why a certain pattern exists would be put forth, taking into account the reasons for pursuit of M&A. The study results aim to test the hypothesis that the intent for an M&A as well as the structure of it is influenced by macroeconomic conditions as represented by boom, slowdown, recession & recovery periods. For this purpose 625 data points containing deals that have happened between 1980 and 2009 (YT 13th July) have been used. The methodology and the results are given in the subsequent sections.