Value creation through cross-border mergers and acquisitions by the Indian pharmaceutical firms

Abstract

Purpose – Cross-border mergers and acquisitions (M&A) have given the opportunity to the emerging market multinationals to add value while implementing the strategy of internationalization. The Indian pharmaceutical firms are also adopting this strategy and the purpose of this paper is to determine the evidence of value creation for their international M&A activity. Design/methodology/approach – In total, 30 cross-border M&A are examined for value addition through accounting (PAT as percentage of net worth, PAT as percentage of capital employed, research and development (R&D) expenses as percentage of operating expenses) and shareholder return (cumulative abnormal returns) measures of the acquirer firm ex-ante and ex-post M&A. The difference in mean values of the variables after the M&A event is determined through Student's t-test. The time horizon selected for accounting variables was five years and the abnormal stock market returns were calculated using domestic market model with the event window being 40 days. Findings – The results indicate no statistically significant difference in the mean values of all the measures except R&D expenses as percentage of operating expenses for the acquirer Indian firms before and after the M&A event. The mean values of abnormal returns were less than those before the M&A activity. Research limitations/implications – The study does not include a control group of Indian firms engaged wholly in domestic M&A activity or those firms who have not merged or acquired at all. Practical implications – The study may point out toward no significant ex-ante value creation in terms of the selected profit measures but it suggests the probability of the strategy being adopted as a solution to problems like the transfer of tacit knowledge in case of technology led competitive advantages in the pharmaceutical industry and the rise of R&D activity. Originality/value – The Indian pharmaceutical industry has been experiencing waves of international M&A activity since 2005 after the implementation of Product patent Act, 2005. However, little research has been done on the sector to understand the value creating implications of such corporate strategic decisions.