Analyzing determinants of value creation in domestic and cross border acquisitions in India

Analyzing determinants of value creation in domestic and cross border acquisitions in India

Reena Kohli

^a,

*, Bikram Jit Singh Mann

^b,1

aFinance,AccountingandControlArea,RoomNo.2,FacultyBlock3,IndianInstituteofManagement,Kozhikode,Kerala,India

bDepartmentofCommerceandBusinessManagement,GuruNanakDevUniversity,Amritsar,143005,India

1. Introduction

Plethoraofresearchhasbeenconductedonassessingtheeffectofdomesticandcrossborderacquisitionsontheacquiring companyshareholderswealth.Asregardstheacquiringcompanywealthgainsindomesticacquisitions,researcherssuggest thatsuchacquisitionseitheryieldnormalreturnsontheannouncement(Asquith,Burner,&Mullins,1983;Bradely,Desai,&

Kim,1983;Dodd&Ruback,1977;Langeteig,1978;Mandelker,1974)orresultinsignificantwealthdestructionforthe shareholders(Doukas&Travlos,1988;Jensen&Ruback,1983;Kiymaz,2004;Kiymaz&Mukherjee,2000;Markides&Ittner, 1994;Marr,Mohta,&Spivey,1993;Morck&Yeung,1991;Mueller,1969;Roll,1986).However,researchers(Conn,Cosh, Guest,&Alan,2005;Seth,Song,&Pettit,2002)evaluatingshareholdersgainsincrossborderacquisitionsopinethatcross borderacquisitionscreatesubstantialwealthgainsfortheacquiringcompanyshareholdersastheseacquisitions,besides conferringthegeneralbenefitsofanacquisition,likeeconomiesofscaleandeconomiesofscope,alsoenabletheacquiring companiestakeadvantageofvariousmarketimperfections.However,thisnotioncannotbegeneralizedtoallcrossborder acquisitions.Thereasonbeing,theresearchers(Campa&Hernando,2004;Connetal.,2005;Donohoe,2006;Eckbo&

ARTICLE INFO

Articlehistory:

Received13October2010

Receivedinrevisedform14October2011 Accepted16November2011

Keywords:

Bidspecificfactors Crossborderacquisitions Domesticacquisitions India

Internalization Marketimperfections Mergersandacquisitions

ABSTRACT

The present study seeks to assess theacquiring company announcement gains, and determinantsthereof,indomesticandcrossborderacquisitionsinIndia.Forthispurpose, 268acquisitionscomprisingof202crossborderacquisitionsand66domesticacquisitions constitute thesampleset. Standardevent studymethodologyhasbeen employedfor computingtheannouncementreturns.Further,regressionanalysishasbeenconductedto assessthesourcesofwealthgainsindomesticandcrossborderacquisition.Theresultsof eventstudyindicatethatcrossborderacquisitionshavecreatedsignificantlyhigherwealth gainsthanthedomesticones.Further,theresultsofregressionanalysishighlightthatcross borderacquisitions,pursuedbytheacquiringcompaniesintechnologyintensivesector,for thetargetcompaniesalsointechnologyintensivesector,createsuperiorwealthgains.The reason being,suchcross borderacquisitions provide anopportunity to theacquiring companytocombineandjudiciouslyutilizeintangibleresourcesofboththecompaniesona broaderscaleacrossnewgeographies.Thus,thestudycontributestotheexistingliterature oninternalizationtheorybyextendingittoanemergingmarketlikeIndia.

*Correspondingauthor.Tel.:+919539761429.

E-mailaddresses:reena@iimk.ac.in,kohlireena@gmail.com(R.Kohli),bikrammann@hotmail.com(B.J.S.Mann).

1 Tel.:+919855299135;fax:+911832258819.

Thorburn, 2000; Goergen &Renneboog, 2004; Lowinski,Schiereck, &Thomas, 2004; Moeller & Schlingemann, 2005;

Tebourbi,2005)whoactuallycomparetheacquiringcompanywealthgainsindomesticversuscrossborderacquisitions, argue thatcrossborderacquisitionsmaynotalwaysoutperformthedomesticacquisitions.Asanexplanationtotheir findingsthisclassofresearchersopinethattheacquiringcompanywealthgainsarenotsolelydrivenbythenationalityofthe target,that is,whethertheacquisitionis foraforeigntargetcompanyorfora domesticone,rather,valuecreationis influencedbyanamalgamofbidrelatedandcompanyrelatedfactors.

Thus,twoviewpointsrelatingtovaluecreationincrossborderacquisitionsemergefromtheextantliterature.Thefirst viewpoint highlightstheroleof marketimperfectionsin valuecreation, whilethesecondviewpointunderlines the influenceofvariousdealandcompanyspecificfactorsonvaluecreation.Adetailedexplanationoftheroleofmarket imperfections,andbidandcompanyspecificfactorsontheacquiringcompanywealthgainsisgiveninthefollowing sections.

1.1. Marketimperfectiontheoryasadriverofvaluecreation

The proponents of market imperfection school of thought offer three competing theories namely international diversificationtheory, internalizationtheoryandexchangeratetheoryasthedriversofvaluecreationincrossborder acquisitions.Thesetheoriesexplainhowmultinationalcorporations(MNCs)takeadvantageofvariousmarketdistortionsto earnmonopolyrentincrossborderacquisitionswhichenabletheseorganizationstomaximizewealthoftheirshareholders.

Anexplanationofthesetheoriesisdetailedasfollows:

International diversification hypothesis: This hypothesisstates thatthe mainmotive of MNCs forexpanding their operations in different countries is to take advantage of imperfections in the financial markets (Hymer, 1976;

Kindleberger, 1969).When financial markets are not properly integrated across boundaries, the rate of return on securities,foragivenlevelofrisk,isnotsimilarindifferentfinancialmarkets.Hence,itgivesanindividualinvestoran opportunitytomaximizehisreturnsbydiversifyinghisportfoliointernationally.However,duetovariousgovernmental restrictionsontheindividualportfolioinvestmentandbecauseofinformationasymmetryonthepartoftheindividual investor,heisnotabletooptimallydiversifyhisportfolio.Hence,corporatediversificationisfavoredoverindividual diversification.

Accordingly,MNCsinvestabroaddirectlyintheformofForeignDirectInvestment(FDI)andtakeoverfirmsindifferent countries and help individual investors in reducing the variability in their earnings. Therefore, an MNC involved in internationaloperationsisabletoenjoylargermonopolisticrentswhenbarrierstocapitalflowsarehigher(Errunza&

Senbet,1981).This,inturn,enablestheseenterprisestocreatehigherwealth fortheirshareholderscomparedtouni- nationalcorporations.Asdiversifyingoperationsviatakingovercompaniesindifferentlocationsisasourceofadditional valuetotheforeignacquirer(MNC),hence,theacquiringcompanyshareholdersareabletogainsubstantialreturnsonthe announcementofsuchforeignacquisitions.

Variousstudieshavefoundtheresultsincorroborationwiththesaidhypothesis.DoukasandTravlos(1988)studythe impactofcorporatemulti-nationalismviaforeignacquisitionsontheacquiringcompanyshareholderswealth.Theysuggest thatthoseacquiringcompaniesthatdiversifytheiroperationsindifferentgeographiesthroughcrossborderacquisitionsare abletoexploituniqueinternationaldistortionsinthecapitalmarketsandthuscreategreaterwealthfortheirshareholders.

Kiymaz and Mukherjee (2000) alsoattribute significantpositive announcement gains in cross border acquisitions to internationaldiversificationhypothesis.Theysuggestthatbenefitstotheacquiringcompaniesincrossborderacquisitions areinverselyrelatedtotheextentofco-movementintheeconomiesofthebidderandthetargetcountries.RieckandDoan (2007)proposethatcrossborderacquisitionscreatehigherwealthgainsforacquiringcompanyshareholdersthanthe domesticonesastheseenabletheacquiringcompaniesovercomeentrybarriers.However,ConnandConnell(1990)donot findanysupporttointernationaldiversificationhypothesis.

Internalizationhypothesis:AccordingtothishypothesisthemainmotivationforMNCsexpandinggloballyistointernalize itsintangibleassets.²Thereasonbeingtheseassetsarebasedontheproprietaryinformationandaredifficulttoorganize externally(Morck&Yeung,1991).However, thevalueoftheseassetsenhancesindirectproportiontothescaleofthe company’soperationsthatinturndependsuponthenumberofmarketsinwhichitoperates.Hence,MNCscreateinternal avenuesforoptimumutilizationofsuchassetsbyexpandingabroadandtakingovercompaniesacrossthegeographies.

Magee(1981)opinesthatoneofthereasonsforMNCsengagingincrossbordertakeoversistofacilitatetheintrafirm transferofinformationasitcanbetransferredmoreefficientlyviainternalchannelsthanbythemarketmeans.Dunning (1973)andBuckleyandCasson(1998)supporttheinternalizationtheoryandstatethatfirmspossessingsuperiorresources expand internationally to properly utilize them. Morck and Yeung (1991) also suggest that investors do not value multinationalityasadiversificationstrategyrathertheyvalueinternalizationasitgivesthecompanyanopportunityto judiciouslyutilizeitsintangibleassets.

2IntangibleassetsasdefinedbyMorckandYeung(1992)includetechnologyrelatedintangibleassets(measuredbyratioofresearchanddevelopment expendituretosales),marketingrelatedintangibleassets(measuredbyratioofadvertisingexpendituretosales)andalsoincludethemanagerialskillsand expertise.MarkidesandIttner(1994)havealsogivenasimilardefinitionandincludeR&Dtechnology,brandnames,managerialknowhowaspartof intangibleassets.

MorckandYeung(1992)conductthepioneeringstudytoexaminetherelationshipbetween stockpricereactionto announcementofforeignacquisitionsandpossessionofintangibleassetsbytheacquiringcompanies.Theyconcludethat foreignacquisitionsyieldsignificantannouncementreturnswhenfirmswithintangibleassetsexpandabroad.Ontheother hand,incaseswherethefirmslackintangibleassets,internationalexpansionviaacquisitionsisatbestawashoutandare viewedbyinvestorsasliabilities.Thus,theysupportforwardinternalizationasthesourceofvaluecreationincrossborder acquisitions.Marretal.(1993)alsosupportforwardinternalizationhypothesisandstatethatforeignacquisitionsleadto valuecreationasaresultofthesynergiesthataccruefromtheuseofintangibleassets.

However,Eun,Kolodny,andScheraga(1996)proposethatcrossborderacquisitionscreatesubstantialwealthgainsfor thoseacquiringcompaniesthatareabletoredeploythetargetcompany’sintangibleassets.Hence,theysupportthereverse internalizationhypothesis.Sethetal.(2002)alsosuggestthatMNCsthatgoforcrossborderacquisitionsderivemostofthe valuefromassetsharingandreverseinternalizationofvaluableintangibleassetsofthetargetcompany.Theyfurtherstate thatwhenexpertiseofatargetfirmiscombinedwiththatofthebiddingfirm,itleadstovaluablenewproductionand investment opportunities for the combined firm. However, Markides and Ittner (1994) find partial support to the internalizationhypothesisasasourceofvaluecreationincrossborderacquisitions.

Exchangeratehypothesis:Theexchangeratehypothesisstates thatthevaluecreationincrossborderacquisitionsis influencedbyfrictionsin theexchangeratemarkets.Asperthis hypothesis,gainsincrossborderacquisitionsforthe acquirerareinverselyrelatedtothetargetcountry’scurrencyvaluations.Thereasonbeingwhenthecurrencyofthetarget’s countryischeap,itislessexpensivefortheforeignacquirertoacquireacompanyinthetarget’scountry.Thus,thecheaper thetarget’scurrency,thehigheristhevaluegainsfortheacquiringcompanyshareholders.FrootandStein(1991)developa modeltostudytherelationshipbetweenexchangeratesandFDI.Theysuggestthatadepreciatedcurrencyofthetarget’s countrygivestheforeignacquireranedgeinbuyingcontrolofacompanyasitmakesthebuyinexpensivefortheacquirer.

MarkidesandIttner(1994)opinethatwealthgainsincrossborderacquisitionsarepositivelyrelatedtothestrengthofthe buyer’scurrency.However,Cakici,Hessel,andTondon(1996)andEunetal.(1996),McCorristonandSheldon(1998)donot findanysupportfortheexchangeratehypothesisasanexplanationofacquiringcompanies’wealthgainsincrossborder acquisitions.

Basedonthediscussionoftheabovestatedhypothesesitcanbededucedthattheannouncementofaforeignacquisition generates significant wealth gains for the acquiring company shareholders because firstly, it gives the acquirer an opportunitytodiversifyitsoperationsacrossthegeographiesandthusspreaditsrisk,secondly,ithelpstheacquirerto utilizeitsintangibleassetsandfinally,itgivesanopportunityfortheacquirertoacquiretargetcompany’svaluableassetsat acheaperprice,thus,takingadvantageofaweakcurrency.Hence,geographicdiversification,exploitationoffirmspecific advantagesandexchangeratefluctuationsarethemainmotivationsforinternationalexpansionofthefirms(Calvet,1981;

Shimizu,Hitt,Vaidyanath,&Pisano,2004).

1.2. Bidspecificfactorstheoryasthedriverofvaluecreation

Contrarytotheabovestatedhypotheses,researcherslikeCampaandHernando(2004),Donohoe(2006),Eckboand Thorburn(2000),Goergen andRenneboog (2004),Moeller andSchlingemann (2005)who comparewealth gains in domesticandcrossborderacquisitionsandfurtherassessthedeterminantsthereof,proposebidspecificfactortheoryasan alternativeexplanationtovaluecreationinacquisitions.Thebidspecifictheorystatesthatwealthgainsinacquisitionsare afunctionofdealspecificfactorsandcompanyrelatedfactors,butnotafunctionofthemarketimperfectionsarisingasa resultofdifferenceinnationalityofthetargetcompany.However,researchrelatedtocomparingthewealthgainsofcross borderacquisitionswiththoseofdomesticacquisitions,usingbidspecificfactortheory,isrelativelyscantyandambiguous.

Researchers like Campa and Hernando (2004), Donohoe (2006), Eckbo and Thorburn (2000) argue that domestic acquisitions outperform the cross border acquisitions. However, researchers like Goergen and Renneboog (2004), CumminsandWeiss (2004)find thatcrossborder acquisitions createhigherwealth gainsthan thedomestic ones.

Furthermore,theseresearchershaveidentifiedvariousdealspecificandcompanyspecificfactorscontributingtovalue creationinsuchacquisitions.

EckboandThorburn(2000)findthatthedomesticacquisitionssignificantlyoutperformtheforeignones.Theyattribute lowerwealthgainsaccruingtoforeignacquirerstothelargersizeoftheacquirers.CampaandHernando(2004)suggestthat crossborderacquisitionsgeneratelesserwealthgainsascomparedtodomesticoneswhensuchacquisitionsarepursuedin highlyregulatedindustries,whileinlesserregulatedindustries,crossborderacquisitionscreatehigherreturnsthanthe domesticones.Besidesregulatoryenvironment,theyalsofindthathostileacquisitionscreatesignificantlyhigherwealth gainsfortheacquirer,irrespectiveofthenationalityofthetargetcompany.MoellerandSchlingemann(2005)alsofindthat crossborderacquisitionssignificantlyunderperformthedomesticacquisitions.Theyproposethattheacquiringcompany shareholdersgainsignificantpositivereturnsinthosecaseswheretheacquiringcompaniesacquireprivatelyheldtarget companiesandalsointhosecaseswheretheseacquirersacquirerelativelylargesizedtargets,irrespectiveofthenationality of the target companies. Donohoe (2006) finds that domestic acquisitions insignificantly outperform cross border acquisitions.Hefurther findsthat,R&Dintensityofthetarget,profitabilityofthetargetinthepreacquisitionperiod, relatedness,andcompetitionamongthebiddersarethefactorsthatadverselyaffecttheannouncementgainsofacquiring companiesinacquisitions.Hence,heconcludesthattheacquiringcompanywealthgainsaredrivenbyamixoftarget’s financialcharacteristicsandbidfeatures.

Highervaluecreationindomesticacquisitionsthanthecrossborderonesisnotuniversalandtheresearchershave foundresultscontrarytoit.GoergenandRenneboog(2004)findthatcrossborderacquisitionscreateinsignificanthigher wealththanthedomesticacquisitions.Theyattributewealthgainsindomesticandcrossborderacquisitionstotwobid characteristicsnamely,theextentofhostilityinanacquisitionandthemodeofpaymentemployedintheacquisition.They opine that the bidding firm shareholders lose significantly in hostile acquisitions and cash financed acquisitions irrespectiveofthenationalityofthetargetcompany.CumminsandWeiss(2004)alsoproposethatacquisitionsthat bestow an opportunity of geographic diversification to the acquirers are value neutral while geography focusing transactionsarevaluedestroying.However,Lowinskietal.(2004)andTebourbi(2005)donotfindanysupportforthebid specificfactortheory.

Thus,areviewoftheabovestatedstudieshighlightsthatoutcomesregardingcomparisonoftheacquiringcompany wealthgainsincrossborderacquisitionswiththoseofdomesticacquisitionsarestillambiguous.However,thestudies statedaboveunderlinetheroleofvariousbidspecificandcompanyspecificvariablesininfluencingtheannouncementgains indomesticandcrossborderacquisitions.Thebidspecificfactorsidentifiedaremodeofpayment,relatedness,hostility, competitionamongbidders,and,thecompanyspecificvariablesare,technologyintensityofthetarget,relativesizeofthe targetcompany,andthesizeoftheacquiringcompany.

Thus, theexisting literature provides differingviewpoints regarding wealth creationin domestic and crossborder acquisitions.Onetheonehand,marketimperfectiontheorystatesthatcrossborderacquisitionscreatehigherwealthgains thanthedomesticones,astheseacquisitionsenabletheacquiringcompaniesearnmonopolyrentsbytakingadvantageof frictionsinvariousmarkets.Whileontheotherhand,bidspecificfactortheoryrefutestheclaimofmarketimperfection theoristsandstatesthatcrossborderacquisitionsmayormaynotyieldhigherwealthgainsthanthedomesticacquisitions.

Thereasonbeing,theyrelatevaluecreation,indomesticandcrossborderacquisitions,totheunderlyingdealspecificand companyspecificfactors.

1.3. Researchquestion

Fromtheabovediscussionitis evidentthatthere isambiguityintheexistingliteratureregarding wealthgainsin domesticandcrossborderacquisitionsandalsoregardingthesourcesofvaluecreationinsuchacquisitions.Thereisaneed to resolvetheenigma inextant researchregardingvalue creationin domestic and cross border acquisitionsand the determinantsthereof.

Further,mostoftheaprioriresearchisrestrictedtodevelopedeconomies,viz.,theUS(Eunetal.,1996;Kiymaz&

Mukherjee,2000;Markides&Ittner,1994;Moeller&Schlingemann,2005;Rieck&Doan,2007),Canada(Eckbo&Thorburn, 2000;Tebourbi,2005)andEuropeannations(Campa&Hernando,2004;Conn&Connell,1990;Cummins&Weiss,2004;

Donohoe,2006;Goergen&Renneboog,2004;Lowinskietal.,2004)andtheresultsofthesestudiesmayormaynotbe extendibletoanemerging marketlikeIndia.Moreover, adramatic risehasbeenwitnessed inoutboundcrossborder acquisitionsbyIndiancompaniessincetheyear2004.AsperthedisclosureofWorldInvestmentReportonmergersand acquisitionsbyUNCTADthevalueofoutboundacquisitionsbyIndiancompaniesrosefrom$2648.55millionintheyear 2005to$30,414millionintheyear2007whichisthehighestvalueofoutboundacquisitionsamongtheemergingeconomies represented by BRICcountries. Furthermore, large sized outbound crossborder acquisitions byIndian companies are becomingorderoftheday.However,researchoncrossborderacquisitionsbyIndiancompaniesissparse(Chakrabarti,2008;

Kale,2009;Zhu&Malhotra,2008)andnostudyhascomprehensivelyanalyzedtheacquiringcompanywealthgainsin domesticandcrossborderacquisitionsandthedeterminantsthereofinIndia.

Thus,thepresentstudyhasbeenconductedwiththefollowingcorrespondingobjectives:

1.ToascertainandcomparetheacquiringcompanywealthgainsindomesticandcrossborderacquisitionsinIndia.

2.ToassessthesourceofwealthgainsindomesticandcrossborderacquisitionsinIndia.

Thefirstobjectiveaimstotesttwoissues.One,whetherthereareanydifferencesintheacquiringcompanywealthgains indomesticandcrossborderacquisitions,inIndia.Two,themagnitudeanddirectionofsuchdifferences,ifany(thatis, whetherthecrossborderacquisitionshaveoutperformedthedomesticones,else,whethertheinverseholdstrue).The secondobjectiveaimstoevaluatethedeterminantsofwealthgainsinthetwosetsofacquisitions,inIndia.

Thus,thestudycontributestotheexistingliteratureas,tothebestofourknowledge;thisisthefirststudytoanalyze theacquiringcompanyshareholderswealthgainsindomesticandcrossborderacquisitionsanddeterminantsthereof inIndia.Hence,thepresentstudyextendstheexistingliteratureonmergersandacquisitionstoanemergingmarket like India.

2. Databaseandsampleselection

Forachievingtheaforementionedobjectives,acquisitionsannouncedduringtheperiod1stJanuary1997till31stMarch 2008 are considered. Information regarding announcement date,outcome date and bid specific factorslike mode of financing,relatednessandcompetitionamongacquirershasbeenobtainedbyscanningtwoleadingIndianfinancialdailies namely,TheEconomicTimesandTheFinancialExpress/Worldfortheabovestatedperiod.Moreovertocrosscheckthe

announcementandoutcomedatesofmergersandtakeovers,officialwebsitesoftheSecuritiesExchangeBoardofIndia (SEBI)andtheBombayStockExchange(BSE)havealsobeenconsulted.DataregardingexchangerateofIndianRupeevis-a`- visforeigncurrencyisobtainedfromtheofficialwebsiteofReserveBankofIndia(RBI).Furtheron,dataregardingmarket valueofacquiringcompaniesandthedailyreturnsofindividualstockofacquiringcompaniesisobtainedfromPROWESS, thedatabasesoftwaredevelopedbyCentreforMonitoringIndianEconomy.

TakingcuefromDessyllasandHughes(2005)andPyykko(2009),thestudyusestheindustrialsectortowhichthe acquiringandthetargetcompaniesbelongasaproxyforintangibleresourcespossessedbythesecompanies.Thus,using SDCThompsonFinancialdatabasethesampleisclassifiedintotwosectors,viz.,technologyintensive(possessingintangible resources)andnon-technologyintensivesector.TheSDCThompsonFinancialdatabaseclassifiesthecompaniesintovarious industrialsectorsbasedonUSSICcodes.AspertheUSSICcodes,SDCThompsonFinancialdatabaseclassifiescompaniesin telecommunicationsectorhavingprimarybusinessactivitieslikeprovidingtelecommunicationservicesormanufacturing telecomequipment;pharmaceuticalsectordealinginvaccines,specialtydrugs,companiesengagedindrugresearchand development,ascompaniesintechnologyintensivesector.Besides,companieswhoseprimarybusinessactivityinvolves computerrelatedservices,viz.,developmentofapplicationsoftware,computerconsultingservices,dataprocessingservices, internetandBPOservicesarealsoclassifiedascompaniesintechnologyintensivesector.Companiesnotengagedinthe businessactivitiesdefinedearlier,areclassifiedascompaniesinnon-technologyintensivesector.

Thesampleisrestrictedtoonlythoseacquisitionsthataresuccessfulandwheretheobjectiveoftheacquireristoacquire amajoritycontrolofthetargetcompany.Suchacquisitionshavebeendeletedwherethemodeofpaymentandthetypeof diversification(whetherrelatedorunrelated)arenotclear.Deletionshavealsobeenmadeforthosecompanieswheredata regardingdailyreturnsoftheacquiringcompaniesisnotavailable.Yearlydistributionofthesampleacquisitionsaswellas distributionaccordingtodifferentbidcharacteristicsisdetailedinTables1and2,respectively.

YearwisedistributionofacquisitionsfromTable1makesitevidentthatthetrendofdomesticacquisitionshasbeen fluctuatingoverthesampleperiod.Ontheotherhand,thetrendofoutboundacquisitionshaspickedupfromtheyear2003, withhighestnumberofacquisitionsreportedintheyear2006.

DistributionofacquisitionsaccordingtobidspecificfactorsinTable2depictsthatcashisthemostfrequentlyusedform offinancinginboththesetsofacquisitions.Hostileacquisitionsarerareinthedomesticmarketwhichmaybeattributedto thephenomenonofconcentratedownershipinthehandsofpromoters.Ontheotherhand,lackofhostileacquisitionsin crossborderacquisitionsshowsthereluctanceofIndiancompaniesinpursuingsuchacquisitions.Further,lessernumberof unrelatedacquisitionsimpliesthatIndiancompaniesarealsoreluctanttoenterintonewareasofoperationsviaacquisitions.

Moreover,contrarytothetrendofdomesticacquisitions,alargeproportionofoutboundacquisitions(119outof202)arein thetechnology intensive sector while a lesser number are in thenon technology oriented sector. Likewise,a larger proportionoftheacquiring(125outof202)andthetargetcompanies(131outof202)fallintechnologyintensivesectorin caseofcrossborderacquisitionscomparedtothoseofthedomesticones.

3. Methodology

Toappraisetheaforementionedobjectivestheanalysishasbeenconductedintwoparts.Firstly,thestandardeventstudy methodologyhasbeenemployedtoassesstheannouncementreturnsoftheacquiringcompaniesindomesticandcross borderacquisitionsseparately.Further,crossbordereffectiscalculatedtocomparethevaluecreationindomesticand foreignacquisitionsandtoevaluatewhichofthesetwosetsofacquisitionsiscreatingmorevaluefortheshareholderson announcement.Secondly,cross-sectionalregressionanalysisisemployedontheentiresampleofdomesticandcrossborder acquisitionstoidentifythedeterminantsofvaluecreationintheseacquisitions.³

Table1

Yearwisedistributionofdomesticandcrossborderacquisitions.

Year Domesticacquisitions Crossborderacquisitions Total

1997 2 1 3

1998 5 1 6

1999 6 3 9

2000 5 10 15

2001 9 5 14

2002 9 7 16

2003 7 17 24

2004 4 19 23

2005 8 39 47

2006 4 48 52

2007 6 43 49

2008(tillMarch08) 1 9 10

Total 66 202 268

3 Appendix1providesthedetaileddescriptionofthemethodologiesbeingusedbytheresearchersintherelatedresearcharea.

1002

3.1. Eventstudy

StandardeventstudymethodologyaspropoundedbyFamaandMacBeth(1973)andFama(1976)hasbeenemployedfor assessingtheimpactofcrossborderacquisitionannouncementon thewealth oftheacquiringcompanyshareholders.

Further,theriskandmarketadjustedvariantofstandardeventstudymethodologywhichisbetterknownasthemarket modelhasbeenused.Therationaleforapplyingeventstudyisthatitmeasurestheimpactofaspecificunanticipatedevent relatedtoacompanyonthewealthofitsshareholdersbyanalyzingtheabnormalreturnsaroundthateventperiod(Brown&

Warner,1980,1985).Thesign(eitherpositiveornegative)andthemagnitudeoftheabnormalreturnsreflectthemarket’s assessmentoftheimpactofsuchadecisiononthelongtermfutureprospectsofthecompany.

Tocalculatetheabnormalreturnsforexaminingthemarketreactiontotheannouncementofcrossborderacquisition, firstly,anestimationperiodisselectedforcomputingtheparameters(

a

and

b

)ofthemarketmodel.Theestimationperiod usedhereist=251tot=51,relativetothefirstpublicannouncementdateofanacquisition(t=0).Dailyabnormalreturn onaparticulardaytistheexcessoftheactualreturnondaytovertheexpectedreturnonthatday.Theexpectedreturnfora particulardaytiscomputedasfollows:

Rˆ_it¼

a

iþ

b

iRmtþ

e

it

where

a

ipresentsthenormalreturnofthesecurityiwhenRmtiszero,

b

imeasurestheriskofsecurityithatis,thesensitivity ofRittothemarketwidefactors.Rmtisthereturnonmarketindex(BSESensexinthiscase).Thus,

b

iRmtcollectivelycapture theeffectofvariablesthataffectthereturnonallsecuritiesoratleastmostofthesecuritieswhile

e

itcapturestheeffectof variablesmorespecifictotheprospectsofasecurityi.

Theabnormalreturn(AR)forasecurityiondaytiscalculatedasfollows:

ARit¼RitRˆit

whereRitistheactualreturnofaparticularcompany’ssecurityiondaytandRˆitistheexpectedreturnonthesameday.

Dailyabnormalreturnsforeachcompanyarecalculatedovertheintervalt=50tot=+50.

Further,dailyabnormalreturns(ARs)havebeenaveragedoverNcompaniesforeachdaytandarecomputedasfollows:

AARt¼XARit

N

whereAAR_tistheaverageabnormaldailyreturnondaytandNisthenumberofcompanies.

Further,cumulativeaverageabnormalreturns(CAARs)arederivedbysummingtheAARsovervarioustimeintervals.For example,CAARsforaparticulartimeintervalt1totnarederivedasfollows:

CAARs¼X^tn

t1

AAR

TocommentuponthesignificanceofCAARsthefollowingteststatisticshasbeenemployed:

Table2

Distributionofdomesticandcrossborderacquisitionsaccordingtobidfeatures.

BidFeatures Domesticacquisitions^a Crossborderacquisitions^b Total

Cashfinancedacquisitions 65 189 254

Stockfinancedacquisitions – 05 5

Acquisitionswithmixedfinancing 01 08 09

Acquisitionswithcompetitivebidders 05 11 16

Acquisitionswithsinglebidder 61 191 252

Hostileacquisition 01 – 01

Friendlyacquisition 65 202 267

Relatedacquisition 65 200 264

Unrelatedacquisition 01 02 04

Acquisitionsintechnologyintensivesector^c 14 119 133

Acquisitionsinnon-technologyintensivesector 52 83 135

Acquiringcompaniesintechnologyintensivesector 15 125 140

Acquiringcompaniesinnon-technologyintensivesector 51 77 128

Targetcompaniesintechnologyintensivesector 26 131 157

Targetcompaniesinnon-technologyintensivesector 40 71 111

a DomesticacquisitionmeansanacquisitionbyanIndianacquiringcompanyofatargetcompanysituatedinIndia.

b OutboundcrossborderacquisitionmeansacquisitionbyanIndianacquiringcompanyofatargetcompanyoperatingoutsidethegeographicterritoryof India.

cAcquisitionsintechnologyintensivesectormeanstheacquisitionswhereboththetargetandtheacquiringcompaniesaredefinedascompaniesin technologyintensivesectorasperthedefinitionofSDCThompsonFinancialdatabase.

Testofsignificanceofcumulativeaverageabnormalreturns¼ Pt_n

t₁ðAAR=

d

AAR_tÞ ffiffiffiffi pN

,whereAARisaverageabnormal returnofallsecuritiesfromdayt1totnandNisthenumberofdaysoverwhichAARsarecumulated.

d

AARtisthestandard deviationofAARovertheestimationperiod(t=251tot=51).

Afterfindingtheimpactofdomestictransactionsandforeigntransactionsindividually,thecrossbordereffectforvarious eventperiodsisalsoascertained.Crossbordereffectmeasuresthedifferencebetweentheabnormalreturnsgeneratedtothe acquiringcompanyshareholdersinforeignanddomesticacquisitionsandhelpsincomparingthevaluecreationforthetwo setsofacquisitions.Independentsamplet-testis alsoappliedtocommentuponthesignificantdifferenceinabnormal returnsofcrossborderanddomestictransactions.

3.2. Regressionanalysis

Cross sectional regression analysis is conducted in the second part of analysis to identify the sources of value creationindomestic andcrossborderacquisitions. Aprioriresearchhasidentified variousbidrelatedfactors andcompany related factors like mode of payment, relatedness, hostility,competition amongbidders, technology intensityofthetarget,relativesizeofthetargetcompanyandthesizeoftheacquiringcompanyasthedeterminants ofwealth gainsindomestic andcrossborderacquisitions. Hence,these variables,exceptforthe variablehostility,⁴ aretakenasexplanatoryvariablesinthevariousregressionmodelstoassesstheirinfluenceonwealthgainsindomestic andcrossborderacquisitionsinIndia.Further,CAARsofthethreedaysrangingfromday1today+1(CAAR3)are takenasthedependentvariable⁵forregression analysis.Theresultofthethreedaywindowisused asitcapturesa major portion of the stock price effect on the announcement of an acquisition and is usually employed by the researchersinregressionmodels(Andrade,Mitchell,&Stafford,2001;Cakicietal.,1996;Cebenoyan,Papaioannou,&

Travlos, 1992; Chari, Ouimet, & Tesar, 2004; Cheng & Chan, 1995; Conn et al., 2005; Danbolt, 2004; Goergen &

Renneboog,2004;Lowinskietal.,2004;Rieck&Doan,2007;Wiegerinck&Eije,2007).Moreover,feasiblegeneralized leastsquares(FGLS)⁶weightedleastsquare(WLS)regressionanalysishasbeenappliedtocontrolfortheproblemof heteroscedasticity. Anexplanation of the various independent variables used in the regression models is given as follows:

Foreign:Thisvariablehighlightsthenationalidentityofthetargetthatis,whetherthetargetcompanyisfromaforeign countryorfromwithinthegeographicboundariesoftheacquirer’scountryitself.Thevariable‘foreign’isusedtomeasure theimpactofnationalityofthetargetontheacquiringcompanyshareholders’wealthandtakesvalue=1whenthetargetis fromaforeigncountry;and=0ifthetargetisadomesticcompany.

Modeofpayment:Inordertomakeadistinctionbetweencashandstockoffers,transactionsfinancedbypreference shares,orbyconvertiblewarrants,orelse,byswappingthecommonstockoftheacquiringcompanies,aretakenasstock financedtransactions,while,othersareclassifiedasthecashfinancedones.FollowingDewenter(1995),thoseacquisitions whicharefinancedpartlywithcashandpartlywithstock,arecategorizedasmixedtransactions.Thevariable‘mode’isused tomeasuretheimpactofmodeofpaymentontheannouncementreturnsoftheacquiringcompanyshareholders.Ittakes value=1ifanacquisitionisfinancedwithcash;and=0ifitisfinancedwithstockandalsoincaseswheremixedfinancingis employed.

Relatedness:Entireproductlinesofthetargetandtheacquirerhavebeenmatchedtodecidewhethertheacquisitionisin relatedorunrelatedareas.Thetransactionisdefinedasarelatedoneifboththeacquiringandthetargetcompanieshave similarproductlines,aswellas,similarareasofoperationsandunrelatedotherwise(Chatterjee,1986).Thevariable‘related’

isusedasameasureofrelatednessandittakesvalue=1forthoseacquisitionswherethetargetandtheacquirerhavesame areasofoperations;and=0forunrelatedacquisitions.

4 Sincethereisonlyonehostileacquisition,hencehostilityhasnotbeenintroducedasanindependentvariable.

5 Inordertotesttherobustnessoftheresults,crosssectionalregressionanalysishasalsobeenconductedtakingCAARsofothereventwindowsviz.,day 1today0,dayzero,day0today+1,day5today+1asdependentvariablesandsimilarresultshavebeenfound.Theseeventwindows(day1today0, dayzero,day0today+1,day5today+1)havebeenextensivelyusedinaprioriresearchforcommunicatingsimilarfindings(Cakicietal.,1996;

Cebenoyanetal.,1992;Connetal.,2005;Danbolt,2004;GoergenandRenneboog,2004;Lowinskietal.,2004;MoellerandSchlingemann,2005).Forthe sakeofbrevity,theresultofthethreedaywindow(day1today+1)hasonlybeenreportedhere.Theresultsofothereventwindowsareavailablefrom authorsonrequest.

6 ThetechniqueisnamedasFGLSweightedleastsquarebyHarvey(1976)andGreene(2000)(ascitedinRamanathan,2008).FGLSisappliedtoobtain consistentandasymptoticallymoreefficientestimatesofparameters,ifheteroscedasticityisfound.Infact,thetechniqueisapplicableforascertainingthe weightsincaseswheresourceofheteroscedasticitycannotbedeterminedprecisely(Ramanathan,2008).Inaprioriresearch,researchershaveemployed weightedleastsquareregressionmodelusingstandarddeviationofthemarketmodelresidual(fromwhichCAARsareobtained)asweights.However,in thepresentstudyevenafterusingstandarddeviationofthemarketmodelresidualasweights,theproblemofheteroscedasticitypersisted.Hence,to controlfortheproblemofheteroscedasticity,FGLSweightedleastsquaremethodology(followingBreushPaganspecification)isadoptedtoassessweights andtoobtainFGLSweightedleastsquareestimatesofparameters.Inthismethodology,firstly,OLSregressionisrunonallindependentvariablesandthe residualsaresaved.Secondly,auxiliaryregressionisrunwherebyresiduals(savedinthefirststep)aresquaredandsquaredresidualsarethenregressedon allindependentvariables(includingtheconstantterm)andthe‘fitted’valuesofthedependentvariable(whicharesquaresofresidualsoforiginalOLS model)aresaved(aspre_1).Ifthereareanynegativevaluesthesearereplacedwiththeoriginalresidualsquarevalues.Thirdly,weightsarecomputed (weight=1/squarerootpre_1).Fourthly,weightssocomputedareusedtotransformbothdependentvariableandindependentvariables.Finally,regression isconductedonthetransformedvariablestoobtainFGLSweightedleastsquareestimatesofcoefficients(Ramanathan,2008).Thefinalregressiondoesnot haveanyconstanttermasithasalsobeentransformed;hence,regressionmodelisrunthroughorigin.

1004

Competitiveacquisitions:Competitiveacquisitionshavebeendefinedasthoseacquisitionswheremorethanoneacquirer isbiddingforacquiringthecontrollingstakeinatargetcompany.Thevariablemultipletakesvalue=1iftherearemorethan onebiddersinanacquisition;and=0whenasinglebidderisthere.

Relativesizeofthetargetcompany:Relativesizeofthetargetcompany(‘relsizet’)iscomputedforexaminingtheimpactof sizeofthetargetcompanyonshareholders’announcementreturnsincrossborderacquisitions.Dealvalueshavebeentaken asaproxyofvalueofthetargetcompany’sassetsforcomputingrelativesize.Since,targetcompaniesbelongedtodifferent countries,thedealvalueisgivenindifferentcurrencies.TheseareconvertedintoIndianrupeesbymultiplyingthedealvalue withtheprevailingexchangerate⁷oftherespectivecurrencyonthedateofactualannouncement.Further,followingMartin (1996)andKohersandAng(2000),relativesizeisdefinedasfollows:

Relativesizeof targetcompany¼Dealvalueasaproxyoftargetcompany⁰sassets DealvalueþMarketvalueof acquiringcompany

Market value of theacquiring companiesis considered for thefinancial year ending immediatelybefore the yearof acquisitionannouncement.

Sizeoftheacquirer:Avariable‘logmv_A’hasbeenintroducedtomeasuretheimpactofsizeoftheacquiringcompanyonthe announcementwealthgains.Sizeoftheacquiringcompanyhasbeenmeasuredbytakingthelogofmarketvalueofthe acquiringcompanyforthefinancialyearendingimmediatelybeforetheyearofacquisitionannouncement.

Technologyintensityofthetargetcompany:Avariable‘technology’hasbeenintroducedtomeasuretheimpactofthetarget companyoperatingintechnologyintensivesectorontheannouncementreturnstotheacquirer.Ittakesvalue=1ifthe targetcompanyisintechnologyintensivesector;and=0otherwise.

Thedefinitionsandtheexpectedsignsoftheindependentvariablesforacquiringcompaniesengagedincrossborder acquisitionsaresummarizedinTable3.

4. Analysisandinterpretation

4.1. Acquiringshareholders’announcementgainsincrossborderanddomesticacquisitions

Thissectiondetailstheannouncementreturnsoftheacquiringcompanyshareholdersindomesticandcrossborder acquisitions.Firstly,theannouncementreturnsoftheacquiringcompaniesindomesticacquisitionshavebeendetailed followedbytheanalysisandinterpretationofannouncementgainsincrossborderacquisitions.Finally,thecrossborder effectmeasuringthedifferenceindomesticandcrossborderacquisitionshasbeenexplained.

Acquiringcompanies’returnsindomesticacquisitions:TheCAARsavailedofbytheacquiringcompanyshareholdersin domesticacquisitionsduringvariouseventperiodsaregiveninTable4.

FromthetrenditisclearthatduringthepreacquisitionperiodtheCAARshavebeenfluctuatingtillthesubperiod20to 11.TheCAARshavepickedupduringthesubperiod10to1(2.57,1.84)whenstatisticallysignificantpositivereturns havebeenavailedofbytheacquiringcompanyshareholderscomparedtothoseofnegativeCAARsofthesubperiod20to 11(2.68,1.92).Duringthesubperiod5to0(1.57,1.45)somedeclineisvisibleintheCAARs.Onactualannouncement day(0.02,0.04)theCAARshaveturnedslightlynegative.However,thethreedaywindow(1.19,1.57)depictspositive, but,statisticallyinsignificantreturns.Inthepostacquisitionperiod,thetrendofCAARshasagainpickedupandtheacquirer hasgainedpositivereturnsduringthesubperiod0to+5(1.57,1.60),followedbyadeclineinthetrendofCAARsforthesub period0to+10(0.45,0.31).However,fromthesubperiod0to+20theCAARshaverecovered(0.47,0.23)andtherecoveryis visibletillthesubperiod0to+40(3.02,1.07).

Table3

Definitionsandexpectedsignsoftheindependentvariablesfortheacquiringcompanies.

Variables Definitionofvariables Expectedsigns

Foreign Foreignacquisition=1and=0fordomesticacquisition +

Mode Cashacquisition=1and=0forstockfinancedandmixedacquisition +

Related Relatedacquisition=1and=0forunrelatedacquisition +

Multiple Competitivebidding=1and=0forsinglebidder

Relativesizeofthetarget(RelsizeT) ^Deal_Deal^valuevalueþMarket^asaproxyvalue^oftargetofacquiring^companycompany^0sassets Sizeoftheacquirer(LogmvA) Measuredbylogofmarketvalueoftheacquiringcompany

Technology Acquisitionsintechnologyintensivesector=1and=0otherwise +

7ExchangeratesaretakenfromthewebsiteofReserveBankofIndiaandareavailableathttp://www.rbi.org.in/scripts/ReferenceRateArchive.aspx.

Thus,fromtheabovediscussionitisevidentthat,exceptfortheeventwindow10to1,thetrendofCAARshasbeen randomacrossvariouseventperiods.Thus, wecan deducethat domesticacquisitionshave notgenerated substantial positiveannouncementgainsfortheshareholders.

Acquiringcompanies’returnsincrossborderacquisitions:ThetrendofCAARstotheacquiringcompaniesengagedincross borderacquisitionsisalsodetailedinTable4.

FromthetrendofCAARsattainedbytheacquiringcompanyshareholdersincrossborderacquisitions,itisapparentthat during the pre acquisition announcement period the CAARs have shown the rising trend from40th day before the announcementoftheacquisition thathassustainedin theimmediate announcementwindow,aswellas,in thepost acquisitionperiod.Duringthepreacquisitionperiod,theCAARshaveshownaconsistentrisefromthesubperiod50to41 (0.56,0.90)tothesubperiod5to0(2.07,4.23),exceptingforadeclineinCAARsforthesubperiod10to1(0.41, 0.64).Onactualannouncementday(1.41,7.05),andthethreedaywindow(2.32,6.71),highlysignificantreturnshavebeen attainedbytheacquiringcompanyshareholders.Therisingtrendhascontinuedinthepostacquisitionperiodtillthesub period0to+10(1.46,2.20).However,fromthesubperiod0to+20(0.91,1.00)decliningtrendinCAARsisvisiblethat continuedtillthesubperiod0to+50(0.64,0.45),exceptforthesubperiod0to+40.

Overall,theannouncementof foreignacquisitionshasyielded highlysignificantwealth fortheacquiringcompany shareholders that started from 40th day before announcement and continued till 10th day after the acquisition announcement.Maximumreturnshavebeenenjoyedbytheacquiringcompanyshareholdersduringthethreedaywindow.

Comparisonofacquirerreturnsindomesticandcrossborderacquisitions:Thecrossbordereffect,measuringthedifferencein abnormalreturnsoftheacquiringcompaniesindomesticandcrossborderacquisitionsasillustratedinTable4,showsthat foreignacquisitionshavecreatedhigherreturnsfortheshareholdersduringthepreacquisitionperiodtillthesubperiod20 to 11 (3.78, 2.71). However, during the sub period 10 to 1 (2.16, 1.33), the cross border effect hasturned insignificantlynegativeandhasagainturnedpositiveduringthesubperiod5to0(0.50,0.47).Thus, duringthepre acquisitionperiod,exceptforthesubperiod10to1(2.16,1.33),thewealthgainsinforeignacquisitionhavebeen higherthanthoseofdomesticacquisitions,hencegeneratingapositivecrossbordereffect.Foreignacquisitionshavecreated highlypositivereturnsondayzero(1.43,2.94),whereas,thedomesticoneshavecreatedslightlynegativereturns(0.02, 0.04),resultinginsubstantialcrossbordereffect(1.43,2.94)onthatday.Duringthethreedaywindowalso,thecross bordereffectispositive(1.13,1.42),thoughnotstatisticallysignificant.Inthepostacquisitionperiod,thepositivecross bordereffecthasprevailedtillthesubperiod0to+20(0.44,0.22),exceptforthesubperiod0to+5(0.13,0.12).Thereason being,inthepostacquisitionperiodtherisingtrendofCAARsfordomesticacquisitionshassustainedtillthe5thdayafter announcement,while,incaseofforeignonesithassustainedtillthesubperiod0to+10.Nevertheless,duringthesubperiod 0to+5,theriseinCAARsfordomesticacquisitionsisgreaterthanthosefortheforeignacquisitions.

Beyondthesubperiod0to+10,theCAARshaveturnedrandomforboththesetsofacquisitions.However,startingfrom thesubperiod0to+20,thecrossbordereffecthasturnedinsignificantlynegative,thushighlightingrecoveryintheCAARs fordomesticacquisitions.

Thus,ananalysisoftheannouncementreturnsofforeignanddomesticacquisitionsandacomparisonofthereturns throughcrossbordereffectrevealsthattheshareholdersoftheacquiringcompanieshaveearnedhigherwealthgainsonthe announcementofforeignacquisitionsascomparedtothoseofthedomesticacquisitions.Theseresultsareinconsonance withthemarket imperfectiontheorythat statesthat crossborder acquisitionscreate substantialwealth gainsforthe acquiringcompanyshareholdersastheseacquisitionsprovidetheacquirersuniqueopportunitiestotakeadvantageof imperfectionsinfinancial,factorandforeignexchangemarkets.

Table4

CAARsmeasuringannouncementeffectandcrossbordereffectforacquiringcompanyshareholdersindomesticandcrossborderacquisitions.

Days CAARsindomesticacquisitions CAARsincrossborderacquisitions Crossbordereffect

CAARD t-Test CAARF t-Test CAARFCAARD t-Test

50to41 1.16 0.83 0.56 0.90 1.72 1.11

40to31 1.65 1.19 0.21 0.33 1.86 1.14

30to21 0.32 0.23 0.46 0.73 0.78 0.50

20to11 2.68 1.92^* 1.10 1.74^* 3.78 2.71^*

10to1 2.57 1.84^* 0.41 0.64 2.16 1.33

5to0 1.57 1.45 2.07 4.23^* 0.50 0.47

Day0 0.02 0.04 1.41 7.05^* 1.43 2.94^*

1to+1 1.19 1.57 2.32 6.71^*** 1.13 1.42

0to+5 1.57 1.60 1.44 3.21^*** 0.13 0.12

0to+10 0.45 0.31 1.46 2.20^** 1.01 0.65

0to+20 0.47 0.23 0.91 1.00 0.44 0.22

0to+30 1.06 0.43 0.04 0.04 1.10 0.42

0to+40 3.02 1.07 1.52 1.19 1.50 0.31

0to+50 2.63 0.84 0.65 0.45 1.98 0.40

*p-Value<0.10.

**p-Value<0.05.

*** p-Value<0.01.

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4.2. Analyzingdeterminantsofwealthgains

Insecondpartofanalysis,regressionanalysishasbeenconductedtoexplorethesourcesofvaluecreationforthewhole sampleset.Forconductingregressionanalysis,‘CAAR3’istakenasthedependentvariableandthevariables‘foreign’,‘mode’,

‘related’,‘multiple,‘relsizeT’,‘logmvA’,‘technology’aretakenasindependentvariables.Further,interactionvariableslike

‘foreigntechnology’,‘foreignrelated’,‘foreignmode’,‘foreignmultiple’havealsobeenintroducedasexplanatory variables.Theinteractionvariablesareintroducedtoascertainwhetherthesevariablesimpacttherelationshipbetweenthe nationality ofthetargetand theannouncementreturns.Theresultsofvarious regressionmodelsemployingdifferent independentvariablesareexplainedinTable5.

Model1isthebasemodelthatemploysallexplanatoryvariables(‘foreign’,‘mode’,‘related’,‘multiple’,‘relsize_T’,‘logmv_A’,

‘technology’)thathavebeenfoundtohaveasignificantinfluenceontheannouncementreturnsoftheacquiringcompany shareholders,asper theproponents of bidspecificfactor theory(Campa &Hernando,2004; Donohoe,2006; Eckbo&

Thorburn,2000;Goergen&Renneboog,2004;Moeller&Schlingemann,2005).Theresultsofmodel1asdetailedinTable5 showthatthevariable‘foreign’hasinsignificantpositivecoefficientwhichimpliesthatvaluecreationinforeignacquisitions isnotsubstantiallygreaterthanthosefordomesticacquisitions,whichiscontrarytotheresultofeventstudy.Theonly variable thatis statistically significantis ‘technology’,though; thevariable‘logmvA’is also significantat10% levelof significance.Thestatisticallysignificantcoefficientofthevariable‘technology’makesitevidentthattheacquisitionsfor target companies operating in technology intensive sector outperform acquisitions for the target companies in non technology sector. Itimplies that technology intensityof thetarget companyis an important variable affecting the announcementgainsin domesticand crossborderacquisitions.Allothervariables haveexpectedsignsexceptforthe variable‘relsize’andthevariable‘related’.However,thesevariablesarenotstatisticallysignificant,meaningtherebythat thesehavelesserinfluenceontheannouncementreturnsaccruingtotheacquiringcompanies.

Astheproportionoftargetcompaniesfallingintechnologyintensivesectorishigherincaseofcrossborderacquisitions (131outof202)ascomparedtothoseofdomesticacquisitions(26outof66),interactionvariable‘foreigntechnology’has beenintroducedinmodel2,⁸toascertainwhethercrossborderacquisitionsfortechnologyintensivetargetcompanyhas createdanysuperiorwealthgains.

Table5

FGLSweightedleastsquareregressionanalysisdescribingtheimpactofvariousbidspecificfactorsontheacquiringcompanyshareholderswealthin domesticandcrossborderacquisitionswithCAAR3(day1day+1)asthedependentvariable.

Independentvariables Model1 Model2 Model3 Model4 Model5

Std.

coefficient

t-Value Std.

coefficient

t-Value Std.

coefficient

t-Value Std.

coefficient

t-Value Std.

coefficient

t-Value

Intercept 1.27 0.06 3.16 0.03 2.25 0.01 1.90 0.02 1.27 0.03

Foreign 0.08 0.67 0.05 0.89 – – – – 0.025 0.88

Mode 0.17 0.57 0.39 0.56 0.41 0.55 0.18 0.69 0.14 0.61

Related 0.85 0.12 1.80 0.12 0.72 0.58 1.06 0.11 0.84 0.07

Multiple 0.04 0.46 0.03 0.57 0.03 0.59 0.03 0.59 – –

RelsizeT 0.001 0.98 0.003 0.96 0.007 0.92 0.003 0.96 0.006 0.93

LogmvA 0.44 0.09 1.78 0.00 1.96 0.00 0.94 0.002 0.42 0.10

Technology 0.20 0.01 – – – – – – – –

Foreigntechnology – – 0.26 0.00 0.27 0.00 0.26 0.00 0.25 0.00

Foreignrelated – – – – 0.18 0.68 – – – –

Foreignmode – – – – – – 0.01 0.96 – –

Foreignmultiple – – – – – – – – 0.004 0.95

F-Value,pvalue 7.24 0.00 8.54 0.00 9.81 0.00 7.77 0.00 7.58 0.00

R² 0.18 – 0.21 – 0.23 – 0.19 – 0.19 –

AdjustedR² 0.16 – 0.18 – 0.21 – 0.17 – 0.16 –

White’sheteroscedasticity^a Fstatistics(pvalue)

1.21(0.21) 0.96(0.52) 0.95(0.55) 1.01(0.46) 1.13(0.30)

White’sheteroscedasticity^a chisquarestatistics (pvalue)

38.96(0.21) 31.20(0.51) 30.74(0.53) 30.32(0.45) 33.47(0.30)

a Heteroscedasticitytestwithcrossterms.

8Inordertotesttheimpactoftechnologyintensityofthetargetcompanyontheannouncementreturnsoftheacquiringcompanies,besidesthe introductionofinteractionvariable‘foreigntechnology’,independentsamplet-testhasalsobeenconductedonthesamplesetsofdomesticandcross borderacquisitionsseparately.Forthis,theacquisitionsfortechnologyintensivetargetcompanieshavebeendefinedasacquisitionsintechnologyoriented sector(takingvalue=1)andtheacquisitionsfornon-technologyintensivetargetcompanieshavebeendefinedasacquisitioninnon-technologyoriented sectors(takingvalue=0).Itisfoundthatacrossthevariouseventwindows,crossborderacquisitionsfortechnologyorientedtargetcompanieshave substantiallyoutperformedthoseforthetargetcompaniesinnontechnologysector.However,thereisnosignificantdifferenceinvaluecreationofthe acquisitionsfortechnologyandnon-technologyorientedtargetcompaniesforthesamplesetofdomesticacquisitions.Thus,itagainreinforcesourresults thatcrossborderacquisitionsfortargetcompaniesintechnology.