Deal making in India hots up

M&A Scenario hots up


Business assets are being bought and sold like never before in the country. According to PricewaterhouseCoopers (PwC), the value of Mergers & Acquisitions (M&A) deals announced in the first six months of 2005 was $6.9 billion, compared to $2.9 billion in the first half of 2004, and more than the $5.2 billion in the whole of 2004. At this rate, the value of M&A activities in the country may touch $15 billion in 2005.

Last year, M&A activities were largely restricted to the IT and telecom sectors. They have now spread across the economy. This is the fourth wave of corporate deal-making in India. The first happened in the 1980s, led by corporate raiders like Swraj Paul, Manu Chhabria and R.P. Goenka. This was around the time that reforms began tentatively under Rajiv Gandhi. In view of the license raj prevailing then, buying a company was one of the best ways to generate growth, for ambitious corporates.

In the early 1990s, Indian business houses began to feel the heat of competition. Conglomerates that had lost focus were forced to sell non-core businesses that could not withstand competitive pressures. The Tatas, for example, sold their soaps business to Hindustan Lever. This marked the second wave of M&As, largely driven by corporate restructuring.

The third wave started at the dawn of the new millennium, driven by consolidation in key sectors like cement and telecommunications. Companies like Bharti Tele-Ventures and Hutch bought smaller competitors and built national networks.

What makes this fourth wave different from the three previous ones is the global flavour of many of the deals. Foreign private equity is coming into Indian companies, like Newbridge's recent investment in Shriram Holdings, Multinational corporations (MNCs) are also entering India. Swiss cement major Holcim’s investment in ACC and Oracle’s purchase of a 41 per cent stake in i-flex solutions (for $593 million) are good examples.

Indian companies are also going abroad. Tata Steel has bought Singapore-based NatSteel for $486 million. Videocon has bought the colour picture tubes business of Thomson for $290 million. Such global forays have become a possibility because foreign exchange is no longer a scarce commodity. India's official foreign exchange reserves at more than $140 billion, exceed the country's total foreign debt. So the government is not worried when companies spend dollars to buy assets abroad.

A paradigm shift is likely in the coming years. Friendly deals could give way to aggressive ones. In future, we may see hostile bids and leveraged buyouts. Most M&As so far have been cash deals. There have been very few stock swaps. As equity prices rise, we will see acquirers using their own stock as currency for acquisitions. As the appetite for deal making increases, the valuation is also bound to go up. In short, exciting times are ahead.

A study by Prashant Kale of University of Michigan, and Harbir Singh of Wharton, on M&As between 1992 and 2002 indicates that in the initial years of economic liberalisation, Indian companies failed to create sufficient value from acquisitions, as compared to MNCs. However, with the passage of time, Indian companies have begun developing the necessary capabilities to create more value from deals. But returns on acquisitions fell after 1998. Presumably, in the earlier period (1992-1997) there were many low-hanging fruits waiting to be plucked. The market for corporate control was not so well developed. Hence assets could be picked up cheap. But after 1998, acquisitions have become more expensive. So much more has to be done to squeeze value out of them.

Investment bankers too expect the price of acquisitions to rise further in the coming months, mirroring the rising prices of listed stocks. The higher the premium, the harder the company has to work to create value for shareholders. Which means M&A deals will have to selected and structured very carefully after studying carefully the potential for generating synergies.