Thursday, 1 September 2011

Discriminant Analysis and Hostile Takeovers

Discriminant Analysis and Hostile Takeovers

Mergers and Acquisitions have been the flavor of the decade ever since the Acquisition of Tetley by Tata Tea. Indian organizations since then have gotten a flair for successfully outbidding and acquiring foreign companies and thus gain a global foot print. A recent activity where Reliance Industries picked up a 14.9% stake in the Oberoi Group as a white knight against ITC Ltd has led open another discussion which had been rage in the West, that of Hostile takeovers. Hostile takeovers have been a very common phenomenon since the 1980s. But statistically speaking hostile takeovers generally lead to acquisitions at very high premiums which could lead to their failures.

In order to measure the success of a hostile takeover a Discriminant Analysis can be used. Financial and investment variables which may be relevant to hostile takeovers are:

· Earnings per share as an estimate of future profits,

· P/E ratio,

· Debt/net worth as a measure of the target firm's ability to finance the proposed debt often associated with a takeover,

· The total number of shares of the common stock,

· The price of the stock,

· The percentage of institutional holdings,

· The percentage of the total number of shares sought by the bidder, which is typically related to what is needed to take control of the firm, and is related to the cost of the takeover bid,

· Cash flow per share, which affects the ability of the target firm to support additional debt, and

· Book value per share as an estimate of the value of the firm

The importance of these variables to the success of a hostile takeover is examined by employing a multiple discriminant analysis (MDA) model, with the groups being the successful and unsuccessful takeovers of the target firms

AUTHOR NAME:Rishi Sonthalia


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