Inorganic growth strategies: An empirical analysis of who
benefits from them?
Since 1991 Indian Industries have been increasingly exposed to both domestic and international competition. This has forced Indian corporate sector to restructure, reengineer to be competitive and deliver value to stakeholders. Relocation and re-distribution of economic power in the hands of BRIC (Brazil, Russia, India and China) drives home the point that India is firmly entrenched in the evolving multi-polar global businesses. Indian companies have adopted organic and inorganic strategies to enhance value for their shareholders. In developed nations like United States, it has been proved that inorganic value enhancement strategies like mergers, acquisitions have very high failure rates. Various financial journals and publications are full of news which relate to both the success and failure of these strategies. The objective of the paper is to ascertain whether mergers and acquisitions are good value enhancing strategies for acquirers or for the target company, in India.
The first section of this paper, we deal with classifying and providing a theoretical framework of all inorganic value enhancing strategies. In the second section we have included a literature review of research papers that have dealt with success and failure of inorganic strategies world over. Using the data of a sample of Indian companies, we have analyzed whether acquisition is a value enhancing strategy, has benefited the acquirer or the target company, in section 3. The last section deals with conclusions and limitations of the study.
Today, the business environment is rapidly changing with respect to competition, products, people, process of manufacture, markets, customers and technology is embedded in all these functions. It is not enough if companies keep pace with these changes but are expected to beat competitors and innovate in order to continuously maximize shareholder value. Inorganic growth strategies like mergers, acquisitions, takeovers and spinoffs are regarded as important engines that help companies to enter new markets, expand customer base, cut competition, consolidate and grow in size quickly, employ new technology with respect to products, people and processes. Thus the inorganic strategies are regarded by companies as fast track strategies for growth and unlocking of value to shareholders.
Post liberalization and reforms, the Indian corporate sector had to restructure, reengineer, innovate to be competitive and to deliver value to stakeholder. This led to increase in mergers and acquisitions in the Indian corporate sectors. The acquisitions of late have been global in nature with big deals like Tata steel acquiring Corus, etc. and Indian companies going global.
The question of whether mergers and acquisitions pay, who gains more out of the deal, is of prime importance both to the management and investors. Finance literature is full of a variety of studies conducted by researchers across the globe addressing this question. A review of the findings of such studies done with respect to mergers in UK and USA shows that M&A destroys value in most cases. With heightened M&A activity happening in the past decade in India, it is important to know about the profitability of M&A in India, which is the objective of this paper. This paper we have looked at 12 cases of acquisitions during the period from 2000 to 2006.
Definition and classification of inorganic growth strategies: In finance literature the growth strategies followed by companies can be broadly classified into organic and inorganic growth strategies. Organic strategies refer to internal growth strategies that focus on growth by the process of asset replication, exploitation of technology, better customer relationship, innovation of new technology and products to fill gaps in the market place. It is a gradual growth process spread...
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