Takeover of privately held targets: An Indian perspective

Abstract

The need to study takeover of private firms separately from that of public firms comes from the fact that the two are distinct in many ways – while they operate in the same environment, the constraints that each faces and the choices one has are very different. In particular, the concentrated ownership of private firms renders to them greater flexibility in terms of both when to sell and how to sell: private firms are typically more closely held and hence face fewer internal agency conflicts versus those prevailing in a public firm (characterized by dispersed ownership). The smaller agency conflicts give the private firms greater bargaining power and it is this greater bargaining power which gives the two valuable options – the timing option as well as the exit option – when and how to sell – a. The “when” option lets the private owner/ manager control the time of sale so as to get the best price (in comparison, a publicly held firm might face public pressure from outside investor who may not possess complete information) b. The “how” option is a choice between an IPO and a takeover – depending, among other factors, on the owners’ preference for ownership Given this significant difference in the decision making of public and private firms, there has been significant research done on studying the bidder returns for takeover of private targets – one of the earliest being the study by Saeyoung Chang in 1998. The US experience in particular has been studied by James Ang and Ninon Kohers in their paper “The take-over market for privately held companies: The US experience”. Similarly, Paul Draper and Krishna Paudyal have studied the return for listed UK acquirers for the period 1981-2001 in their paper “Acquisitions: Private versus Public”. These, as well as many more papers, have almost equivocally established the abnormal positive return for bidder firms in the event of a private takeover. This study is an attempt to study the bidder returns for an Indian company having done the acquisition of a private target. Primary searches do not show a similar study on Indian companies having been done already. While this paper does not attempt a comparison between takeovers of private versus public firms; it seeks to study the bidder returns for private takeovers trying to develop and test various hypotheses related to factors affecting these returns. The paper is structured in the following fashion: Section I describes the main hypotheses and results of the various studies conducted globally in this area; Section II details the data used, more specifically the criteria applied to arrive at the data set on which the various tests were carried out followed by the methodology and the techniques employed for the various hypotheses; Section III then talks about the results of such empirical analysis carried out and the validity of the varied hypotheses. Section IV concludes with a summary of the Indian experience.