Price premium puzzle in overseas acquisitions by EED-MNCs

Abstract

Indian companies acquired 244 foreign companies in the last six years (January 2000 to March 2006). For the calendar years 2005 and 2006, the outbound FDI figure from India was considerably greater than the inbound FDI. Of late, the size of these deals involving overseas acquisitions by India Inc has grown significantly with companies acquiring firms that are over four times their size. It might be worthwhile at this stage to stop and question the motivations driving this growing spate of high value deals. This question gains even more significance in the wake of the current global trend towards consolidation. For instance, the recent Tata-Corus deal saw two firms from emerging economies, namely Tata Steel and CSN, willing to pay about nine times the EBITDA multiple, as compared to the industry standard of six times the EBITDA multiple, to acquire a strong foothold in the European market. It is clear that in such a scenario, a large proportion of the value is appropriated by the seller. However, the study aims to understand the rationale for the buyer to pay such huge premiums. The existing literature does not correlate this premium to important factors like the Liabilities of Origin. As more and more firms from emerging economies enter the developed countries through the acquisition route, the argument that Liabilities of Origin becomes the major determinant of these premiums gains considerable importance. However, to be able to identify the incremental effect of Liabilities of Origin on the deal premium paid, it is necessary to first identify all other factors that constitute this premium viz. synergies, competitive bids, industry effects etc. Once identified, the effects of these factors have to be eliminated from the calculated premium. The residual premium can then be attributed to the Liabilities of Origin.