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VIKALPA VOLUME 37 NO 2 APRIL - JUNE 2012 33

R E S E A R C H

includes research articles thatfocus on the analysis and

resolution of managerial andacademic issues based on

analytical and empirical orcase research

ExecutiveSummary

Motives for Mergers and Takeoversin the Indian Mutual Fund Industry

Charu Banga and Amitabh Gupta

KEY WORDS

Motives

Mergers and Takeovers

Factor Analysis

Market Share

Mutual Fund Schemes

The Indian industry has seen a phenomenal consolidation through a spate of mergers

and takeovers during the last decade. The mutual fund industry in India is no excep-

tion. It therefore becomes very important to understand the motives of mergers and

takeovers in the Indian mutual fund industry. However, there is a significant difference

between a corporate merger and the merger of a mutual fund. The present study uses

various motives (variables) of corporate mergers and takeovers that fit in case of mo-tives for mergers and takeovers of mutual fund schemes. As far as India is concerned,

this is the first study of its kind; even in the international arena, limited research is

available in this area. A two-stage multivariate procedure is used to identify the impor-

tant factors that drive the merger of a mutual fund scheme from the viewpoint of an

acquirer.

The present study conducts a survey of 65 fund managers through a questionnaire

containing fifteen statements to examine the motives behind the mergers and takeo-

vers of mutual fund schemes.

It checks the internal consistency and the reliability of the data using the Cronbachs

Alpha. It performs an exploratory factor analysis using the fifteen statements in the ques-

tionnaire as different variables.

Finally, it examines the important motives by conducting an ordinary least squares

regression using the factors extracted from factor analysis.

The results reveal the following:

The factor analysis produces six broad factors, viz., attractive price, fund govern-

ance, expansion of marketing and management capabilities, expansion of asset size,

benefits of diversification, and increase in the market share.

These six factors are then subjected to multiple regression with increase in the mar-

ket share as the dependent variable. The regression shows that three out of the five factors tested are significant.

The findings of the study suggest thatexpansion of marketing and management capa-

bilities, expansion of asset size, and benefits of diversification are the three most impor-

tant motives behind mergers and takeovers of mutual fund schemes in India. The study

is valuable to the financial economists, asset management companies, fund managers,

unit holders, and the regulators in order to understand the important factors that influ-

ence mergers and takeovers of mutual fund schemes in India and their implications in

order to make regulations for the mutual fund industry.

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The Indian mutual fund industry has come a long

way since its inception in 1964. At present, there

are 38 mutual funds managing 891 schemes out

of which 597 are open-ended and 241 are closed-ended

while the remaining 53 are interval schemes1. Over the

years there has been a rapid growth in the assets under

the management of the mutual fund industry from a

meager Rs. 250 mn in 1964-65 to Rs. 680 bn in 1999-2000

to Rs. 1,500 bn in 2004-05, and to Rs. 5,827 bn in June

20092. It is evident that the growth in the assets have

been at a much faster pace in the last decade or so. This

has also been the time when the Indian mutual fund in-

dustry entered into a new wave of consolidation and

growth through mergers and acquisitions.

Mergers and acquisitions of corporates are a much stud-

ied research area worldwide (Jensen and Meckling, 1976;

Yen, 1987; Healy, Palepu and Ruback, 1992 Kohers andAng, 1990) as well as in India (e.g., Pawaskar, 2001;

Swaminathan, 2002; Mantravadi and Reddy, 2008;

Gupta, 2008). However, corporate mergers differ from

mergers of mutual funds. The seminal work of Jayaraman,

Khorana and Nelling (2002) provides an insight into the

various aspects of mergers in the mutual fund industry.

It is very surprising that research in this area is very lim-

ited. Therefore, the present study attempts to fill the re-

search gap and looks at the motives that drive a merger

or takeover of a mutual fund in India. One thing worth

mentioning here is that there is a difference in the usageof terminology abroad and in India. Outside India, a

mutual fund is synonymous with the term fund

whereas in the Indian context, a mutual fund floats or

manages schemes (what is known abroad as a fund)

through an asset management company.

The present study contributes to the existing literature

by being the first study for an important emerging mar-

ket like India to examine the motives behind mergers

and takeovers of a mutual fund scheme. The results of

the study indicate that expansion of asset size of a mu-tual fund scheme, expansion of marketing and manage-

ment capabilities, and benefits of diversification are the

three most important motives for mergers and takeo-

vers in the Indian mutual fund industry.

CORPORATE MERGER/TAKEOVER VS. MERGER/TAKEOVER OF A MUTUAL FUND SCHEME

A merger of a mutual fund refers to the transfer of net

assets of the target fund in favour of the acquiring fund

in exchange of shareholding in equal proportion of the

acquiring fund (Ding, 2006). Mergers and takeovers in

the Indian mutual fund industry can take three forms.In the first instance, mergers and takeovers take place

between Asset Management Companies (AMCs)

wherein two AMCs merge with one another and the

merged AMC handles each scheme separately. The sec-

ond form could be a merger and takeover of schemes

whereby individual schemes are takeover by another

AMC. Lastly, a merger or a takeover can take place by

affecting Changes in the Trust by changing the AMC

and handing it over to new fund managers.

The first two forms of mergers and takeovers have oc-curred in India but the third form related to changes in

the trust has never happened in the Indian mutual fund

industry. The present study only looks at the second

form of scheme mergers and takeovers in India due to

non-availability of data required to examine the other

two forms. The merger or the takeover activity has to

confirm to SEBI (Mutual Funds) Regulations, 1996.

A merger of a mutual fund differs from a corporate

merger in many ways (Ding, 2006). Firstly, there is a

significant difference in the legal and the organizationalstructure of a mutual fund and that of a company. The

sponsor of a mutual fund and its board of trustees are

the key entities in the mutual fund business and there-

fore they take any decision pertaining to any change in

the constitution of a mutual fund. The structure of the

Indian mutual fund differs from that in other parts of

the world. For example, in the US, a mutual fund is

formed as an investment company and in the UK, an

open-ended fund is in the form of a unit trust whereas a

closed-ended fund is in the form of an investment com-

pany (Sadhak, 2003). Unlike the US and the UK, the le-

gal structure of the Indian mutual fund industry is quite

different. In India, a mutual fund is formed as a trust

under the Indian Trusts Act, 1882 and the sponsor of

the mutual fund (which is an existing financial services

company) executes the trust in favour of the trustees

(which is a separate company). The trustees hold the

property of the mutual fund in trust for the benefit of

the unit holders. The mutual fund appoints an asset

MOTIVES FOR MERGERS AND TAKEOVERS IN THE INDIAN MUTUAL FUND INDUSTRY

1 See AMFI Update, April-June 2009, 9(I): 1-12.2 For details, check http://www.amfindia.com/showhtml.aspx?page=

mfindustry.

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management company that launches and operates

schemes of the mutual fund.

Secondly, the approval criterion in case of a merger or a

takeover of a mutual fund is different from that of a com-

pany. In case of a company, approval is required from

at least 75 per cent of the shareholders of the target com-

pany whereas in case of a mutual fund scheme, the per-mission of 75 per cent of unit holders is not mandatory

as they are provided with an exit option to redeem their

units before the merger or the takeover. The third and

the most important difference is the determination of

price. In the case of a corporate merger, the acquiring

company ultimately pays the value of a target company

based on its share price that is decided either through

negotiations or through the bidding process. On the

other hand, the price of the target scheme is calculated

as the value of the assets of the target scheme based onits net asset value that is further transferred to the ac-

quiring scheme. The last difference is that in case of com-

panies, there may be a hostile takeover but in case of a

mutual fund, it is usually a friendly takeover (Ding,

2006).

LITERATURE SURVEY

Extensive research has thrown light on various theories

and motives of mutual fund mergers. Sirri and Tufano

(1998) is the first to identify the three major determi-

nants that affect the cost of a fund and asset flows such

as the size of a fund, its marketing and distribution ex-

penses, and its awareness through media. They find that

a large fund in terms of asset flows would be a more

recognized brand and would involve less search costs

as compared to small-sized funds. Further, Lunde,

Timmermann and Blake (1999) investigate the various

reasons affecting the closure of a mutual fund such as

survivorship bias, length of the life span of a fund and

the level of past returns of a fund. They believe that few

funds have a short closure period because the unit hold-ers are well informed about the funds performance. On

the other hand, some funds enjoy a long closure period

because either the unit holders take time to understand

the weak performance of the fund or they give time to

that fund to improve its performance over a period of

time. They point out that the past returns of the fund is

a prominent factor determining its performance and its

probability of closure.

Jayaraman, Khorana and Nelling (2002) are the first to

highlight the major motives that drive a merger of a

mutual fund in the US. They find that one of the impor-

tant factors leading to a within-family merger is the poor

performance of funds. This helps the mutual fund in

retaining its assets and management fees with the fund

house. The target funds experience a negative net asset

flow a year before the merger, thereby pushing the fund

house to merge the fund with an intention to renew its

interest in the minds of investors. The study, however,

reports that the net asset flows still remain negative for

the acquiring funds even a year after the merger. An-

other important factor influencing the performance of a

mutual fund pointed by Berk and Green (2004) is the

excess returns of a fund. They observe that these excess

returns can increase up to a certain point and beyond

this level, these excess returns become unpredictable.

They also find that there exists an inverse linear relationbetween the age of the fund and its survival rate. Zhao

(2004) points out three kinds of exit decisions liqui-

dation, within-family mergers, and across-family merg-

ers. He suggests that any of these three exit decisions

taken into consideration by the mutual fund will result

in non-existence of the portfolio of that fund. He reports

that particularly those portfolios that are small in size

and unique in nature end up via liquidation or through

across-family merger in case of American mutual fund

industry.

Allen and Parwada (2006) examine the investors behav-

iour towards the merger of Australian mutual funds.

Their results show that in case of open-ended funds,

there is no increase in net income flow whereas in case

of closed-ended funds, an improvement is observed in

the last three quarters of the post-merger year. On the

other hand, there is a reduction in assets for open-ended

funds whereas there is an increase of assets for closed-

ended funds in the post-merger period. Ding (2006) tests

various determinants of a mutual fund merger such as

size of the funds, growth rate, performance, net flows,age of the fund, economies of scale, fund goverance fac-

tor, option of liquidation, and merger costs. He finds

that the under-performed and small-sized mutual funds

use the path of fund mergers rather than liquidation.

Zhou and Chiang (2007) study the motives behind 930

mutual fund acquisitions during January 1993 to Decem-

ber 1999. They discuss synergy, managerial talent, a re-

spectful performance record, absence of shareholder

involvement in corporate governance as a few impor-

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tant features of mutual fund acquisitions. The results

indicate that synergy is the most prominent determinant

for a mutual fund acquisition and thereby helps in re-

ducing distribution and administrative charges.

In India, research in the area of mutual funds has fo-

cused primarily on analysing their performance evalu-

ation by using various techniques that look at the stockselection and market timing abilities of fund managers.

Some research has also gone into understanding differ-

ent styles of portfolio management and issues related

to corporate governance (Barua and Varma, 1991;

Gupta, 2000a, 2000b, 2004, 2008; Narasimhan and

Vijayalakshmi, 2001; Chaudhuri, 2007), etc.

DATA AND RESEARCH METHODOLOGY

Data and Sample Selection

The information on the mutual fund schemes that un-

derwent a merger or a takeover during the period Janu-

ary 1, 2000 to December 31, 2007 was taken from the

website of Association of Mutual Funds in India (AMFI),

Value Research Online database, and various online

newspaper articles. The initial sample comprised 80

mergers and takeovers of open-ended schemes3. The

fund managers of the acquiring schemes were mailed a

questionnaire regarding the motives behind mergers and

takeovers of mutual fund schemes. Out of 80 fund man-

agers, 12 could not be contacted because of their non-working e-mail-ids and their cross-border jobs. Also, 3

fund managers expressed their inability to fill in the

questionnaire due to paucity of time. Thus, the response

rate is computed as:

= completed interviews/(completed interviews +

non-working email ids + respondent refusals)

= 65/(65 + 12 + 3)

= 81.25 %

Thus, the questionnaire used in the present study has aresponse rate of 81.25 per cent and the responses received

from 65 fund managers form the data for the study.

Research Methodology

As a first step, the present study uses a questionnaire to

examine the motives behind the mergers and takeovers

of mutual fund schemes. Lehmann (1989) suggests cer-

tain steps to be followed for the preparation of a ques-

tionnaire; the present study also follows the same. Firstly,

various motives behind the corporate mergers and takeo-

vers are identified following the extant literature. Sec-

ondly, those motives that fit in case of mutual fund

mergers and takeovers are enlisted. Thirdly, these mo-

tives are then transformed in terms of statements. Thus,

the questionnaire was designed to contain fifteen state-

ments. These statements asked the fund managers to

indicate their belief on the five-level Likert scale of 1 to

5 where 1 meant strongly disagree, 2 meant disagree,

3 meant neither agree nor disagree, 4 meant agree and

5 meant strongly agree. Annexure 1 provides a copy of

the questionnaire mailed to the fund managers of the

acquiring schemes.

Further, a two-stage multivariate procedure is used to

identify the important factors that drive the merger of a

mutual fund scheme from the viewpoint of an acquirer.

In the first stage, an exploratory factor analysis is per-

formed using the fifteen statements in the questionnaire

as different variables. In the second stage, ordinary least

squares regression is performed using the factors ex-

tracted from factor analysis.

Description of Statements

This section gives the justification for various variables

that fit in case of motives for mergers and takeovers ofmutual fund schemes and that are used in the present

study.

The first motive in the questionnaire relates to the re-

placement of inefficient managers of the target schemes.

Grinblatt, Titman and Wermers (1995), find that replace-

ment of poorly performing fund management is impor-

tant in order to enhance the shareholders wealth.

Therefore, replacement of inefficient managers becomes

the first variable for our study.

The second motive is regarding the protection and in-

crease in the market share and market power.

Jayaraman, Khorana and Nelling (2002) and Zhao (2004)

also point out that across-family mergers of mutual

funds take place with an intention to increase their mar-

ket share.

The third motive pertains to expansion through merg-

ers rather than internal growth. Block, Hirt and Short

(2000) explain that the impact of acquiring undervalued3 In the Indian mutual fund industry, the words mergers and take-

overs are used interchangeably.


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assets leads to external growth and expansion. They

suggest that it is an easy way to progress as compared

to internal growth. Therefore, expansion rather than in-

ternal growth becomes the third variable for the study.

To allow for new product development and new mar-

kets is the fourth motive, Healy, Palepu and Ruback

(1992) discuss that mergers lead to creation of new busi-ness opportunities by making possible the entry into new

products and markets. Zhou and Chiang (2007) point

out that one of the important strategic determinants in

case of across-family mergers of mutual funds is enter-

ing a new market. Hence, new product development

becomes the fourth variable of the study.

The fifth motive talks about receiving the benefits of

synergy. Jensen and Ruback (1983) explain the benefits

of synergy in the form of operating economies, financial

economies, and differential efficiency. Zhou and Chiang(2007) also find that synergy is the most important mo-

tive in case of mergers of mutual funds. Therefore,

synergy is considered as the fifth variable of the study.

To expand marketing and management capabilities is

the sixth motive stated in the questionnaire. Berk and

Green (2004) and Zhou and Chiang (2007) posit that

management capabilities are a scarce resource of a mu-

tual fund organization that leads it to the path of suc-

cess. The real expectation from a cross-family consolida-

tion is efficient utilization of marketing strategies anddistribution channels that would facilitate increased cash

flows (Sirri and Tufano, 1998). Therefore, expansion of

marketing and management capabilities becomes our

sixth variable.

The seventh motive is that the price offered to target

schemes seems attractive. Kohers and Ang (2000) and

Block, Hirt and Short (2000) argue that an attractive price

is important in reality to extract the merger gains and

hence, is a significant motivating factor for the target

organization. Therefore, we consider attractive price asthe seventh variable.

The eighth motive talks about the benefits from the brand

value of the target schemes. Berk and Green (2004) state

that brand value of the target funds gives an opportu-

nity to the acquiring funds to have a better post-merger

financial performance. Therefore, the brand value of tar-

get schemes becomes the seventh variable of the study.

To provide unit holders an opportunity to diversify their

holdings is the ninth motive stated in the questionnaire.

Jayaraman, Khorana and Nelling (2002) and Ding (2006)

mention that the efficiency of a merger of mutual funds

depends on whether the fund is able to exploit the econo-

mies of scale and provide greater portfolio diversifica-

tion for investors or not. They consider it as an important

factor that the mutual fund considers at the time of a

merger agreement. Therefore, we take benefits of diver-

sification as the ninth variable of the study.

The tenth motive talks about enhancing the reputation

of the acquiring schemes. Many a times, corporate re-

structuring is undertaken not for reducing the costs but

for enjoying the benefits of reputation (Dranove and

Shanley, 1994). Enhancement of reputation is thus con-

sidered as the tenth variable of the study.

To eliminate those schemes that are small and thus have

inferior growth opportunities is the eleventh motivetested in the study. Ding (2006) points out the impor-

tance of eliminating small-sized, poorly performing

funds through mergers. He observes that these small

schemes with less growth opportunities lead to ineffi-

cient utilization of the assets. Sirri and Tufano (1998),

Zhao (2004) and Chan, Faff, Gallagher and Looi (2008)

also emphasize that size of the fund affect its perform-

ance. Zhou and Chiang (2007) state that the asset size of

a fund is inversely related to the probability of a merger;

hence small schemes with inferior opportunities be-

comes the eleventh variable of the study.

The next motive in the questionnaire is regarding the

mergers being used to support the well-performing

schemes by enhancing their asset size through corpo-

rate restructuring. Jayaraman, Khorana and Nelling

(2002) and Ding (2006) find that merger of mutual funds

is important in order to channelize the assets of poor

performing funds into funds with high growth strate-

gies. Therefore, expansion of asset size is considered as

the twelveth variable.

The thirteenth motive in the questionnaire is whether a

merger is taken as a substitute for liquidation of a

scheme. Ding (2006) and Zhao (2004) argue that liqui-

dation is a better option for fund management when they

do not find any match to extinguish the inefficient funds

and by doing so, the assets of that fund are also retained

back and reinvested in any other fund of the mutual

fund. Hence, merger as a substitute for liquidation is

considered as the thirteenth variable of the study.

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The board of trustees governing the mutual fund is less

willing to tolerate poor performance and therefore initi-

ates a merger. This is the next motive stated in the ques-

tionnaire. Ding and Wermers (2005) explain that the role

of board is very important as they may increase the com-

pensation paid to a fund manager in case of superior

performance; on the other hand, it can also replace a

manager in case of underperformance. They also show

that the quality of fund governance has a significant role

in the performance of the mutual fund. Hence, fund

governance becomes the fourteenth variable of the

study4.

The last and the fifteenth motive in the questionnaire

relates to human resource deployment. Capron, Dussage

and Mitchell (1998) and Healy, Palepu and Ruback (1992)

find that mergers and takeovers are targeted for human

resource deployment in order to reduce the costs of tar-get organizations. Therefore, human resource deploy-

ment is taken as the fifteenth variable of the study.

RESULTS

The inputs of the 65 fund managers taken from the ques-

tionnaire are first put to a reliability test. Cronbachs

Alpha is used in the present study to check the internal

consistency and reliability of the data. The alpha so com-

puted basically measures the average correlation among

the observed variables. When the data items are notmeasured at all and there is only an error component,

then the alpha is equal to zero. On the other hand, when

all the items are measured and there is no error compo-

nent, then the alpha value is equal to one. The present

study has an alpha of 0.7. Field (2005) reports that the

cut-off range of Cronbachs alpha is 0.7-0.8. This indi-

cates that these variables can combine together to pro-

duce the broad factors. Hence, our study shows a reliable

data set. Further, an exploratory factor analysis is car-

ried on the data set. This is a technique of data reduc-

tion whereby the main factors are extracted that explains

the correlation among the observed variables. We use

Principal Component Analysis (PCA) as the factor ex-

Table 1: Rotated Component Matrix

Main Factors

Attractive Fund Enhancement Expansion of Benefits of IncreasePrice Governance of Asset Size Marketing and Diversification in Market

Management ShareCapabilities

Attractive Price 0.919 0.192 0.054 0.168 -0.089 0.003

Small Schemes -0.808 0.090 0.171 0.139 0.025 0.260

Brand Value of Target Schemes 0.747 0.312 -0.027 0.027 0.019 0.133

Expansion rather than Internal Growth 0.646 -0.017 0.507 0.048 -0.174 0.469

Fund Governance -0.084 0.869 0.272 0.051 0.338 -0.132

New Product Developments 0.242 0.842 -0.104 0.118 -0.084 0.283

Human Resource Deployment 0.343 0.795 0.154 0.180 0.308 -0.083

Enhancement of Asset Size -0.005 0.042 0.874 -0.272 0.078 -0.085

Enhancement of Reputation -0.222 0.345 0.742 0.011 0.077 -0.248

Replacement of Inefficient Managers -0.383 0.115 -0.626 -0.342 0.453 0.022

Expansion of Marketing and -0.004 0.312 0.079 0.909 -0.037 0.061Management Capabilities

Synergy 0.077 -0.062 -0.342 0.829 0.155 0.303

Benefits of Diversification -0.168 0.161 -0.006 0.105 0.927 0.106

Substitute for Liquidation 0.225 0.316 0.075 -0.043 0.628 -0.542

Increase Market Share -0.006 0.154 -0.289 0.321 0.094 0.819

4 Fund governance means internal governance mechanism handled by the board of trustees with an objective of protecting the interest of investorsin relation to fees, asset flows, and performance (for details, see Tufano and Sevick (1997), and Khorana, Tufano and Wedge (2007)).


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traction method for identifying distinct clusters of ob-

served variables. The broad factors so extracted are fur-

ther subjected to Varimax Orthogonal Rotation with

Kaiser Normalization (Dillon and Goldstein, 1984;

Tryfos, 1998). Table 1 gives the Rotated Component

Matrix. A rotated component matrix indicates the rela-

tionship between broad factors and the observed vari-

ables. It provides the broad factors having non-zero and

significant factor loadings with a few variables. In the

present study, each row in the rotated component ma-

trix presents the factor loadings for each variable (in to-

tal 15 variables are used in the study) spread over six

broad factors.

The first factor shows the highest loading for attractive

price (0.919). This means that an attractive price offered

to target schemes is definitely considered by the fund

managers to be an important motive for the merger ortakeover of a mutual fund scheme. Block, Hirt and Short

(2000) believe attractive price as an important motive in

case of corporate mergers and the same holds true for

the present study in case of mutual fund mergers. Elimi-

nation of small and poor performing schemes (-0.808),

brand value of target schemes (0.747), and expansion

rather than internal growth (0.646) are other variables

that form a part of the first factor. Thus, the first factor is

named after the variable with the highest loading as at-

tractive price.

Fund governance shows the highest positive loading of

0.869 in case of the second factor. As discussed earlier,

the sponsors and the board of trustees are the key peo-

ple who take strategic decisions for a mutual fund. The

fund managers of the merged schemes also believe that

they are the ones who play an influential role in the

merger or takeover of mutual fund schemes. Our results

are consistent with those of Ding (2006). Other variables

that form a part of this factor include new product de-

velopments (0.842) and human resource redeployment

(0.795). Therefore, fund governance is termed as the sec-ond broad factor that influences the mergers and takeo-

vers of mutual fund schemes.

The third factor shows a high positive loading for

expansion of asset size (0.874). This means that expan-

sion of asset size is an important motive behind merg-

ers and is taken as the third factor. Our results support

Jayaraman, Khorana and Nelling (2002) and Ding (2006).

Other variables that form a part of this factor include

enhancement of reputation (0.742) and replacement of

inefficient managers (-0.626).

Expansion of marketing and management capabilities

shows the highest loading of 0.909 and is considered as

the fourth factor. This motive appears to be relevant, as

the target schemes have already built up their sales pro-

motion and distribution network that would benefit theacquiring schemes (Berk and Green, 2004). Synergy is

another variable with factor loading of 0.829 that forms

a part of this factor. Therefore, the fourth factor is termed

as expansion of marketing and management capabili-

ties.

The next factor indicates high loadings for benefits of

diversification (0.927) and is named accordingly. The

fund managers also consider greater diversification as

an important motive and thus, our results are in the same

direction as those of Ding (2006). Merger as a substitute

for liquidation is another variable that forms a part of

the fifth factor with a factor loading of 0.628.

Increase in market share shows high loadings of 0.819.

Thus, it becomes the sixth main factor of our study. This

suggests that increase in the market share and market

power is an important motive not only in case of corpo-

rate mergers/takeovers but also in case of mutual fund

mergers/takeovers. Thus, the Indian mutual fund in-

dustry also considers mergers and takeovers as one of

the ways by which market extension and product ex-

tension can take place.

Now, the six factors so derived from factor analysis are

put to the second stage of the multivariate analysis, i.e.,

ordinary least square regression. In this stage, we ex-

amine the impact of the five independent variables on

the increase in market share. The increase in market

share is taken as a dependent variable constituting a

merger decision. This is because when the merger or

takeover of a mutual fund scheme is undertaken for any

motive, it will ultimately result in an increase in market

share. Since the factors used in the regression model are

derived through the orthogonal transformations, they

are free from multicollinearity problems. Further, the

other assumptions for regression such as normality,

heteroscedasticity, and autocorrelation are also tested.

We find that the data are normally distributed and there

are no problems of heteroscedasticity and autocorrela-

tion.

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The results of the regression model give the R-squared

value as 0.322 and adjusted R-squared as 0.264. The F-

Statistic of 5.509 (p = 0.000) is significant at 1 per cent

level of significance. The Durbin-Watson statistic of 1.326

signifies that autocorrelation is not present among the

independent variables.

Table 2 gives the results of regression. Out of the fiveindependent variables tested in the present study, four

variables, viz., attractive price, expansion of asset size,

expansion of marketing and management capabilities,

and benefits of diversification show a positive relation

whereas one variable, i.e., fund governance, shows a

negative relation with the merger decision (increase in

market share). However, only three factors out of the

five show significant values. Expansion of marketing and

management capabilities and expansion of asset size are

highly significant at 5 per cent and benefits of diversifi-cation is moderately significant at 10 per cent level re-

spectively. Hence, the results of our study suggest that

the three most important motives for mergers or takeo-

vers of Indian mutual fund schemes are expansion of

marketing and management capabilities, expansion of

asset size, and benefits of diversification.

Table 2: Regression Results

Variables Standardized T Sig.Coefficients

BetaIncrease in Market Share 9.767 0.000(Constant)

Fund Governance -0.108 -0.804 0.424

Attractive Price 0.064 0.567 0.573

Expansion of Marketing and 0.306 2.588 0.012*

Management Capabilities

Expansion of Asset Size 0.378 3.277 0.002*

Benefits of Diversification 0.239 1.906 0.062**

* Significant at 5 % level ** Significant at 10 % level

CONCLUSION

Research in the field of mergers and takeovers of mu-

tual funds has not received much attention though phe-

nomenal work exists for their corporate counterparts.

The present study is the first of its kind for the Indian

mutual fund industry and thus attempts to fill the exist-

ing research void. The study investigates the motives

behind mergers and takeovers of mutual fund schemes.

A survey of 65 fund managers is conducted whose in-

puts are put to a two-stage technique of factor analysis

and regression analysis. The results of factor analysis

produce six broad factors, viz., attractive price, fund

governance, expansion of marketing and management

capabilities, expansion of asset size, benefits of diversi-

fication, and increase in the market share. These six fac-

tors are then subjected to multiple regression with

increase in the market share as the dependent variable.

The results of regression show that three out of the five

factors tested are significant. Therefore, expansion of

marketing and management capabilities, expansion of

asset size, and benefits of diversification are the three

most important motives behind mergers and takeovers

of mutual fund schemes in India. These results also in-

dicate that the mergers and takeovers of the mutual fund

schemes in India are carried out to capture the benefits

of well-spread distribution networks of the acquired

schemes. This would help the mutual funds to save ontheir marketing costs and increase their asset base that

in turn would help in achieving economies of scale. Fu-

ture research can look into the post-merger performance

of mutual fund schemes and changes in various other

scheme characteristics such as the expense ratio, the

portfolio turnover, growth in assets, etc., due to a merger

or a takeover.

The results of the study have many practical implica-

tions. They are valuable to financial economists, asset

management companies, fund managers, and unit hold-ers in understanding the important factors that influ-

ence mergers and takeovers of mutual fund schemes in

India. They may also be useful to the market regulators

in framing policy for the mutual fund industry. For in-

stance, at present there is no separate code or guidelines

for mergers or takeovers for the mutual fund industry

though there exists a separate code for mergers or takeo-

vers for companies. Looking at the increased number of

mergers and takeovers in the mutual fund industry, SEBI

would probably like to formulate a separate code for

the industrys proper regulation. The results of the study

indicate that expansion of asset size is an important

motive for a merger or a takeover. At times it is seen

that the size of the mutual fund schemes is too small to

construct an effective portfolio. Such schemes also have

high transaction and marketing costs due to their inher-

ent small structure and are thus easy targets for a takeo-

ver. SEBI would probably like to rethink to fix a

minimum size for the corpus of the schemes.


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ANNEXURE 1: QUESTIONNAIRE

In the present research study, we examine the motives behind mergers/takeovers in the Indian mutual fund industry.We have

prepared 15 statements on the basis of the existing research work available on mergers/takeovers. We request you to please fill

in the questionnaire as per the motive(s) behind the merger/takeover of your scheme(s).

Note: A Likert differential scale is used to evaluate the level of agreement or disagreement with the statement in the question-

naire.

A five-level Likert scale is used where: 5 = Strongly Agree, 4 = Agree, 3 = neither agree nor disagree, 2 = Disagree and 1 =

Strongly Disagree.

There are fifteen statements in total. Please tick the response in the appropriate box.

No. Statements 5 4 3 2 1

1. To replace the inefficient managers of the target schemes.

2. To protect and increase the market share.

3. Expansion through acquisition rather than internal growth

4. Mergers and takeovers for new product development and to enter into new markets

5. For the benefits of synergy

6. To expand marketing and management capabilities

7. Price offered to target schemes attracts them to go for a merger.

8. To benefit from the brand value of target schemes

9. To provide unit holders an opportunity to diversify their holdings

10. For enhancement of reputation of the acquiring schemes

11. To eliminate schemes those are small and have inferior growth opportunities

12. To enhance the asset size of the acquiring schemes

13. Is merger taken as a substitute for liquidation of a scheme?

14. Board of directors governing the fund is not willing to tolerate poor

performance and therefore initiate a merger. (Fund Governance)

15. Human Resource Redeployment

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Charu Banga is an Assistant Professor in the Department ofFinancial Studies, Shaheed Sukhdev College of Business Stud-ies, University of Delhi. She teaches Financial Markets andCorporate Taxation. She has done M.Com from University ofDelhi and Ph.D from the Department of Financial Studies,University of Delhi. Her research interest is in the area of mu-tual funds. She has published one book titled, Indian Economyand Reforms. She has contributed to a number of research pa-pers in the area of finance and mutual funds in reputed jour-nals. She is an active member of the editorial board of hercollege journal, The Analyst Street.

e-mail: [email protected]

Amitabh Gupta is an Associate Professor at the Departmentof Financial Studies, University of Delhi, South Campus. Heearned his Ph.D from University of Delhi in 2000 from wherehe also did his MFC, M.Phil, and M.Com. He has worked in

the financial services industry in the fields of equity research,investments, and mutual funds and was a visiting Fellow atthe Maison des Sciences de l Homme, Paris in 2003. He hasauthored a book entitled:Mutual Funds in India: A Study of In-vestment Management and co-edited two books: Indian CapitalMarket: An Empirical Study and Indian Stock Market: An Empiri-cal Study. His research work published in Business Standardentitled Mutual Funds: Where is the Public Money and TheArt of Mutual Back Scratching raising questions on certainpractices of mutual funds was probably a precursor for policychanges by SEBI in the mutual fund industry. He has pub-lished over two dozen research papers in the area of mutualfunds, stock market efficiency, insider trading, corporate gov-ernance, and the effect of various corporate announcementson share prices. He has presented papers in international con-ferences in Italy and Turkey.

e-mail: [email protected]


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