Cross-Border vs. Domestic Acquisitions: Evidence from India

Abstract

Firms in a fast growing emerging economy have opportunities to either grow organically or inorganically through domestic and cross-border acquisitions. Using a broad sample of 1,508 deals by Indian acquirers in the nine-year period from 2002 to 2010, we examine the impact of firm characteristics, firm governance and product market competition on the acquisition decision. We show that the probability of a firm making a cross-border vs. a domestic acquisition is not independent of the probability of firms choosing to make an acquisition in the first place. Using a sequential LOGIT framework, we find that larger and younger firms are more likely to make an acquisition. We also find that relatively overvalued firms with high industry-adjusted Tobin Q are more likely to make acquisitions. Firms with lower leverage are likely to make an acquisition but among acquirers, firms with more cash are more likely to make a cross-border acquisition. Firms with higher levels of promoter (founder) holdings are less likely to make an acquisition and make a domestic acquisition rather than a cross-border acquisition However, firms belonging to an ownership group are more likely to make an acquisition. Product market competition within the industry is an important determinant of M&A activity, with firms in more competitive industries more likely to make an acquisition and more likely to make a cross-border acquisition. The short-term market reaction to the announcement of acquisitions by Indian firms is positive and significant, but is driven by acquisitions made during the initials years post liberalization.