Multiple Models in Predicting Acquisitions in the Indian Manufacturing Sector: A Performance Comparison

Abstract

Aim/Purpose: Acquisitions play a pivotal role in the growth strategy of a firm. Extensive resources and time are dedicated by a firm toward the identification of prospective acquisition candidates. The Indian manufacturing sector is currently experiencing significant growth, organically and inorganically, through acquisitions. The principal aim of this study is to explore models that can predict acquisitions and compare their performance in the Indian manufacturing sector. Background: Mergers and Acquisitions (M&A) have been integral to a firm’s growth strategy. Over the years, academic research has investigated multiple models for predicting acquisitions. In the context of the Indian manufacturing industry, the research is limited to prediction models. This research paper explores three models, namely Logistic Regression, Decision Tree, and Multilayer Perceptron, to predict acquisitions. Methodology: The methodology includes defining the accounting variables to be used in the model which have been selected based on strong theoretical foundations. The Indian manufacturing industry was selected as the focus, specifically, data for firms listed in the Bombay Stock Exchange (BSE) between 2010 and 2022 from the Prowess database. There were multiple techniques, such as data transformation and data scrubbing, that were used to mitigate bias and enhance the data reliability. The dataset was split into 70% training and 30% test data. The performance of the three models was compared using standard metrics. Contribution: The research contributes to the existing body of knowledge in multiple dimensions. First, a prediction model customized to the Indian manufacturing sector has been developed. Second, there are accounting variables identified specific to the Indian manufacturing sector. Third, the paper contributes to prediction modeling in the Indian manufacturing sector where there is limited research. Findings: The study found significant supporting evidence for four of the proposed hypotheses indicating that accounting variables can be used to predict acquisitions. It has been ascertained that statistically significant variables influence acquisition likelihood: Quick Ratio, Equity Turnover, Pretax Margin, and Total Sales. These variables are intrinsically linked with the theories of liquidity, growth-resource mismatch, profitability, and firm size. Furthermore, comparing performance metrics reveals that the Decision Tree model exhibits the highest accuracy rate of 62.3%, specificity rate of 66.4%, and the lowest false positive ratio of 33.6%. In contrast, the Multilayer Perceptron model exhibits the highest precision rate of 61.4% and recall rate of 64.3%. Recommendations for Practitioners: The study findings can help practitioners build custom prediction models for their firms. The model can be developed as a live reference model, which is continually updated based on a firm’s results. In addition, there is an opportunity for industry practitioners to establish a benchmark score that provides a reference for acquisitions. Recommendation for Researchers: Researchers can expand the scope of research by including additional classification modeling techniques. The data quality can be enhanced by cross-validation with other databases. Textual commentary about the target firms, including management and analyst quotes, provides additional insight that can enhance the predictive power of the models. Impact on Society: The research provides insights into leveraging emerging technologies to predict acquisitions. The theoretical basis and modeling attributes provide a foundation that can be further expanded to suit specific industries and firms. Future Research: There are opportunities to expand the scope of research in various dimensions by comparing acquisition prediction models across industries and cross-border and domestic acquisitions. Additionally, it is plausible to explore further research by incorporating non-financial data, such as management commentary, to augment the acquisition prediction model.