Abstract
This paper examines the effect of mode of financing employed in mergers and acquisitions on the announcement period returns of the acquiring and the target companies' shareholders in India. The study is divided into two sections.
The first section analyses the announcement returns of both the acquiring as well as the target companies� shareholders with the help of market model. It has been found that maximum value has been created for the shareholders of the target companies engaged in cash offers followed by the shareholders of acquiring companies engaged in cash offers, target companies engaged in stock offers, and lastly, for acquiring companies engaged in stock offers. However, in contrast to the results of prior research, the study shows that the within-group stock offers have created positive wealth for acquiring companies� shareholders that have generally lost value in stock offers. To discern the probable reasons for the positive value being created in within-group stock offers especially for the acquiring companies� shareholders, the second section analyses the interaction between the announcement returns of the acquiring and the target companies engaged in stock offers and insiders'/promoters' ownership level. This is so because the review of literature highlights two views regarding value creation in within-group stock offers. One view relates to the tunnelling effect whereas the other relates to the value added effect. The tunnelling effect states that within group acquisitions by the acquiring companies with controlling shareholders are aimed at shifting the resources from one group company where the acquiring company has lower cash flow rights to another group company where it has higher cash flow rights or to itself for maximizing the benefits of the controlling shareholders at the expense of minority shareholders. The value added view states that within-group acquisitions by the acquiring companies with controlling shareholders are aimed at creating various financial and economic synergies by pooling the resources of both the companies in the post- acquisition period.
The analysis reveals that the within-group stock offers have created value with increase in level of ownership with maximum value being created when controlling shareholders' ownership reaches the highest level (the category OWN> 49%). Likewise, not only acquiring companies' but the target companies' shareholders have gained positive returns. It means the stock market has reacted positively to the news of stock offers when these are undertaken by companies belonging to the same group as well as when the ownership is concentrated in the hands of promoters. Thus, we deduce that in India, within-group stock offers are not aimed at tunnelling of resources by the acquiring companies; rather these are aimed at creating value by providing an internal market where the group companies can pool their resources and hence can create various kinds of synergies in the post-acquisition period. Hence, the results are in consonance with the value added view. Thus, in the world of information asymmetry, the mode of financing along with ownership structures are the signals through which the stock market assesses the value creating potential of an acquisition.