MERGERS AND ACQUISITIONS IN INDIA A THESIS SUBMITED TO THE MAHARAJA SAYAJIRAO UNIVERSITY OF BARODA FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN MANAGEMENT STUDIES BY RAHUL V. VYAS Under the supervision of Prof. (Dr.) G. C. MAHESHWARI Faculty of Management Studies SEPTEMBER 2012 M. S. PATEL INSTITUTE FACULTY OF MANAGEMENT STUDIES THE MAHARAJA SAYAJIRAO UNIVERSITY OF BARODA VADODARA - 390002 DECLARATION It is hereby declared that the thesis entitled “Mergers and Acquisitions in India” has been prepared by Rahul Vasudevbhai Vyas. The analysis, discussion and conclusions have been drawn on the basis of the data collected by me. The thesis presents the results of the original work. This work not been submitted to any other university for awarding any degree or diploma. Rahul Vasudevbhai Vyas (Researcher) [Prof. G. C. Maheshwari] (Supervisor, Faculty of Management Studies) ACKNOWLEDGMENT The present study has been completed under the supervision of Prof. (Dr.) G. C. Maheshwari, Professor in Finance and Accounting, Faculty of Management Studies, the M. S. University of Baroda, Baroda. I am greatly obliged for his valuable guidance in completing this study. In fact there are no words to express my gratitude to Prof. (Dr.) G. C. Maheshwari, for the intellectual discussion, valuable suggestions, encouragement in moulding the work in the present format. Without his personal involvement, warmth of affection and whole hearted dedication I would not have completed the present study. I am indeed, greatly indebted to him. I am also grateful to Ms. Maheshwari who provided moral support like a mother. I am also obliged to Prof. (Dr.) K. Pushpanadham, Associate Professor, Faculty of Education and Psychology, M. S. University Baroda, Vadodara for supportive and kind co-operation throughout the duration of the study by accommodating my requests even at his inconvenience. I am grateful to Prof. Alla Subba Rao, Professor, Department of Economics, M. S. University Baroda, Baroda for clarifying and fine-tuning the statistical issues related to the study. My sincere thanks to the Bombay Stock Exchange (BSE) and data feed staff members for providing required data for the study and their kind cooperation throughout the duration of the study. I also thankful to Librarian, Shrimati Hansa Mehta Library and Indian Institute of Management, Ahmedabad for permitting use of the library throughout my work for referring valuable materials and collecting data from various sources. I Last but not the least, the role of my family members has indeed been very crucial for the successful completion of the work. I am especially thankful to my parents, my wife, my daughter and my son for the moral support and meaningful co- operation and every sacrifice which remained crucial for the successful completion of the work. Rahul Vasudevbhai Vyas II CONTENTS PARTICULARS PAGE No. Acknowledgement I List of Tables IV List of Figures VII List of Abbreviation IX CHAPTER SCHEME 1. Introduction 1 2. Mergers and Acquisitions in India 39 3. Literature Review 94 4. Legal Aspects of Mergers and Acquisitions 151 5. Wealth Effect of Mergers and Acquisitions: 206 An Event Study 6. Case Studies 262 7. Conclusion and Recommendations 351 Bibliography 365 III LIST OF TABLES Table No. Particulars Page No. 2.1 Value of cross-border M&A by region/economy of seller, 2003-May 2011 72 2.2 Value of cross-border M&A by region/economy of purchaser, 2003- May 2011 74 2.3 Number of cross-border M&A by region/economy of seller, 2003- May 2011 (Number of deals) 76 2.4 Number of cross-border M&A by region/economy of purchaser, 2003- May 2011 (Number of deals) 78 2.5 Value of Cross-Border M&A, by Sector/Industry of seller, 2003 -May 2011 (Millions of Dollars) 80 2.6 Value of Cross-Border M&A, by Sector/Industry of Purchaser, 2003 - May 2011 (Millions of Dollars) 81 2.7 M&A By Continent 82 2.8 Years of Mergers and Acquisition 83 2.9 M&A by Number of equity shares: Offer Size 83 2.10 M&A by Percentage of equity capital: Offer Percentage 84 2.11 M&A by Price of equity shares: Offer Price 84 2.12 M&A by objective of the offer 84 2.13 M&A by Targeted post offer stake of acquisition ( Total percentage of equity capital) 85 2.14 M&A by Continent (Price in Million) 85 IV 2.15 M&A by Industry of Acquirer/ Acquirers 86 2.16 Value of cross-border M&A of Indian economy, 2003-May 2011 (Millions of dollars) 66 3.1 Evidence from short-run event studies 134 3.2 Evidence from long-run event studies 136 3.3 What RIL shareholders will get? 126 3.4 Demerger of RIL holdings 126 4.1 Comparison of Competition Act with MRTP 168 4.2 Threshold for combined size of acquiring and target companies 159 4.3 Filing Fee 162 4.4 Timelines and fast track endevour 163 4.5 Lock-in period for special securities issued to the acquirer company 172 4.6 Sectoral cap on Investment by persons residents outside India 194 5.1 Market reaction to M&A announcements (%) for Acquirer Companies 240 5.2 Market reaction to M&A announcements (%) for Target Companies 240 5.3 Market reaction to M&A announcements (%) for Combined (Target + Acquirer) 241 5.4 Market reaction to M&A announcements (Median) for Acquirer Companies 241 5.5 Market reaction to M&A announcements (Median) for Target Companies 241 5.6 Market reaction to M&A announcements (Median) for Combined (Target + Acquirer) 242 5.7 Market reaction to M&A announcements for Acquirer companies segmented by Indian and Foreign Companies 242 V 5.8 Market reaction to M&A announcements for Combined companies segmented by Indian and Foreign Companies 243 5.9 Cumulative Abnormal Return Event Period (-11 to +11 days) 244 5.10 Average Abnormal Return :Event Period (-11 to +11 days) 244 5.11 Cumulative Abnormal Return: Post Estimation Period (0 to +180 days) 245 5.12 Average Abnormal Return: Post Estimation Period (0 to +180 days) 245 5.13 Cumulative Abnormal Return (%) Pre Estimation Period (0 to -180 days) 246 5.14 Average Abnormal Return (%) Pre Estimation Period (0 to -180 days) 246 5.15 Cumulative Abnormal Return: Total (+180 to -180 days) 247 5.16 Average Abnormal Return: Total (+180 to -180 days) 247 5.17 Cumulative Average Abnormal Return (%) 248 6.1 Cumulative Abnormal Returns (CAR) of RIL 281 6.2 Cumulative Abnormal Returns of L&T 282 6.3 Cumulative Abnormal Returns (CAR) of RIL and L&T 283 6.4 Summary of Major Events in L&T Takeover 284 6.5 Cumulative Abnormal Returns (CAR) of Vodafone 316 6.6 Major Events in Hutch Takeover 317 6.7 Cumulative Abnormal Returns (CAR) of Reliance Industries 342 6.8 Major Events in RIL and Bharti AXA Takeover 342 VI LIST OF FIGURES Figure No. Particulars Page No. 1.1 Process of Event selection 12 2.1 Cross-border Sales and Purchases, 2002–May 2011 46 2.2 Cross-border Sales & Purchases by Developed Economies 2002 – May 2011 50 2.3 Cross-border Sales and Purchases by Developing Economies, 2002 - May 2011 49 2.4 M&A of Indian companies by continent during the period 2002-03 to 2010-11 56 2.5 M&A of Indian companies by continent during the period 2002-03 to 2010-11 (Excluding Indian Companies) 57 2.6 Purchases of Indian Companies by Continent and Year 61 2.7 Average equity price paid by acquiring companies in India 64 5.1 Distribution of M&A events across Industry groups 225 5.2 Illustration of the Event Study Approach 226 6.1 A simplified structure of the acquisition of Hutch by Vodafone 312 VII LIST OF APPENDICES Appendices Particulars Page No. No. 1.1 List of target and acquirer companies under studied period 15 2.1 Tables of M & A 72 3.1 Tables of Event Studies 134 5.1 Tables of Market Reaction to M & A announcement 240 6.1 Board of Directors of L&T under RIL 285 6.2 Board of Director of L&T under Birla 286 6.3 Changing pattern of Shareholding in L&T during the Takeover Attempts 287 6.4 RIL Shareholding Pattern in 2001 288 6.5 L&T Shareholding Pattern in 2001 289 6.6 Daily return data of RIL and L&T 290 6.7 Daily return data of Vodafone 318 6.8 Daily return data of RIL 343 VIII ABBREVIATION AR Abnormal Returns ADR American Depositary Receipts AMEX American Stock Exchange AAR Average Abnormal Returns AP Average Price BAG Bharti AXA General Insurance Company Limited BAL Bharti AXA Life Insurance Company Limited BEL Bharti Enterprises Limited BoB Bank of Baroda BOPL Bharti Overseas Private Limited BP Bargained Price BSE Bombay Stock Exchange BVL Bharti Ventures Limited CAAR Cumulative Average Abnormal Return CAR Cumulative Abnormal Return CCI Competition Commission of India CDS Center for Development Studies CEO Chief Executive Officer CGP CGP Investments Holdings Ltd CIS Commonwealth Independent States CP Closing Price CRSP Center for Research in Security Prices EEFC Exchange Earners’ Foreign Currency EGM Extraordinary General Meeting IX EMH Efficient Market Hypothesis FDI Foreign Direct Investment FERA Foreign Exchange Regulation Act FII Foreign Institutional Investor FIPB Foreign Investment Promotion Board FMGC Fast Moving Consumer Goods FVCI Foreign Venture Capital Investors GCPL Godrej Consumer Products Ltd GDR Global Depositary Receipts GFMSL Global Fuel Management Services Ltd GIC General Insurance Corporation GSL Godrej Soaps Limited HEL Hutchison Essar Limited HK Hong Kong HLL Hindustan Lever Ltd HTIL Hutchison Telecommunications International Limited HWL Hutchison Whampoa Limited ICDR Issue of Capital and Disclosure Requirements IPCL Indian Petrochemicals Corporation Ltd IPO Initial Public Offer IT Information Technology ITNL IndusInd Telecom Network Ltd KFTC Korea Fair Trade Commission KSE Korean Stock Exchange L&T Larsen and Toubro LBO Leveraged Buy Out LIC Life Insurance