Choice of financing in Indian mergers and acquisitions

Abstract

M&A activity in India has grown exponentially since 2005. India Inc. has clocked deals worth $50 Billion already this year, almost three times the value for the entire year 2009. Deal flow and magnitudes are on the rise and M&A in India is poised to grow even bigger, in line with a booming economy and robust capital markets system. But there are still several issues in the M&A process that are not clear. One of them is the choice of payment method. The financing decision can also have serious corporate control, risk bearing, tax and cash flow implications for the buying and selling firms and shareholders. In this study, we examine the choice of payment method and its determinants across a large sample of Indian M&A transactions. Indian markets provide an ideal backdrop for this study because of the wide range of ownership structures, corporate governance rules, corporate laws, securities regulations and market conditions that are prevalent here. Such a study has not been done before with Indian M&As and there is opportunity for research to be conducted in this area to analyze the booming M&A market in India. The crux of this work is to pinpoint the factors that significantly affect the choice of financing in Indian M&As, and the relative importance of each factor. In an M&A currency decision, the acquirer is faced with the decision of complete cash, complete stock or a mixed payment mode, each having conflicting effects. The bidder faces a trade-off between corporate governance issues and the positive effects of leverage in the balance sheet, by choosing between debt and equity options. We are looking to see if any empirical evidence exists that deal value, bidder and target financials have a bearing on the choice of financing by studying 260 M&As involving Indian firms, over a time period of 5 years.