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Indian industry's 40% mergers caste-based, create lower value than caste-distant deals

By Rajiv Shah
Suggesting that India’s business class is still not out of its feudal culture, a recent study on merger and acquisition (M&A) deals of top Indian business houses, carried out jointly by scholars of the Indian Institute of Management-Bangalore, and Pomona College, Claremont, California, United States, has found that the “observed percentage of same-varna mergers” is 40.11%, which is at least “twice as high as” (15.47% to 20.34%) as M&A carried out with firms that do not have the same varna.
Identifying varna to mean five different castes, Brahmins, Kshatriyas, Vaishyas, Shudras, and “lowest”, Dalits, the study reaches “analogous results” when M&A is measured in terms of jati or sub-castes. It says, “While the observed percentage of same-jati M&A deals is 22.53%, as for other M&A deals, these were “less than half of that, ranging from 5.6% to 7.67%.”
A varna-wise breakup suggests that 48.6% out of 284 M&A deals by Brahmins were with Brahmins, 12.3% were with Kshatriyas, 23.2% with Vaishyas, 15.8% with Shudras, and none with Dalits. Similarly, of the 130 deals carried out by Kshatriyas, 30.8% were with Kshatriyas, 28.5% with Brahmins, 19.2% with Vaishyas, 21.5% with Shudras, and none with Dalits.
As for the Vaishyas, 55.4% of the 187 M&A deals were carried out only with Vaishyas, 21.3% with Brahmins, 12.2% with Kshatriyas, 10.5% with Shudras, and just 0.7% with Dalits. As for 189 deals by Shudras, 45% were with Shudras, 23.8% with Brahmins, 14.8% with Kshatriyas, 15.9% with Vaishyas, and only 0.5% with Dalits. And, of the two deals by Dalits, one was with a Dalit, and another one was with a Brahmin.
Based on M&As data from Thomson One SDC and Prowess, which are repositories of database of large firms, the study, titled “Firms of a Feather Merge Together: Cultural Proximity and M&A Outcomes”, by Manaswini Bhalla, Manisha Goel, VSK Teja Konduri, and Michelle Zemel, believes that these differences are “highly statistically significant”.
The study – which is based on an analysis of varna and jati of board of directors of 1,255 firms that entered into M&A deals for the period 2000- 2017 – reaches the drastic conclusion that “when the boards of directors of the target and acquirer have the same dominant varna (jati), the likelihood of merger between them increases by 11.4% (17.4%) relative to when boards of the firms do not have the same dominant varna (jati).”
Interestingly, however, the study refrains from naming the firms which it says it has analysed.
At the same time, the study states that, ironically, “Caste-proximate M&A deals create less value than caste-distant deals for both acquirer and target.” Thus, results of what are called “cumulative abnormal returns (CARs)” show that “caste-proximate deals create lower value than caste-distant deals for both acquirer and target, and consequently for the merged entity.” 
In fact, it insists, “The market penalizes merger announcements between firms whose directors have similar caste backgrounds.”
The study says, “When boards of directors of target and acquirer have the same dominant varna, the CAR of the acquirer upon announcement of the deal is 0.9% lower than if boards of directors of the two firms were not varna-proximate.” It believes, “This percentage difference in CARs between caste-distant and caste-proximate deals is large, given that the return is realized over a two-day announcement window. Thus, the stock market has a substantially worse reaction to caste-proximate deals than to others.”
Pointing out that a “similar result emerges on examining CARs of target firms around the announcement of M&A deals”, the study says, “Caste proximity between boards of acquirer and target firms reduces market’s valuation of the target.” It adds, “Target CARs are 2% lower in varna-proximate deals than in others.”
The study emphasises, “If the acquirer and target firm boards share the same dominant varna, then the announcement day CARs of the combined firm are on average 2.2% lower than for mergers in which the two boards do not share a dominant varna. For a one level increase in the hierarchal distance between the dominant varna of the acquirer and target boards respectively, the combined firm CAR increases 0.7%.”

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