Takeover announcements, open offers, and shareholders’ returns in target firms

Abstract

The empirical studies in the context of developed countries have consistently pointed out substantial valuation gains for target firms, particularly in case of successful takeovers. This effect has been "found to be higher for tender offers compared to mergers and proxy contests, the other forms of plays in the market for corporate control. Subsequent to enactment of takeover enabling regulations in 1997 in India, takeovers and substantial acquisition of shares necessitate making open offer to the investors. Based on the empirical investigation of 14 large (above Rs 10 crore) takeover related open offers using event study methodology, we document significant announcement effect (» 10%) associated with the takeovers in Indian capital market. We also find that the target firm valuations increase in the runup to announcement. However, unlike developed countries, substantial part of these gains are wiped out subsequently indicating that valuation gains associated with takeovers in large part reflect private value of control, expected to be high in the Indian context The fact that only one large open offer (out of 16 in all) was associated with an attempted unsuccessful hostile takeover bid suggests that given relatively large insiders' shareholdings, takeovers as governance mechanisms are not likely to be effective and private value of control may be the driver in the market for.