Revival in M&A deals this year as India Inc expands

The number of M&A deals this year has surpassed that in 2007, after a lull due to the financial crisis

The number of merger and acquisition (M&A) deals involving Indian companies is seeing a revival signalling the appetite of Indian business for growth at home and abroad. According to PV Sahad, founder and publisher , VCCircle, there have been over 700 M&A deals worth $54 billion in 2010, which surpasses the glorious days of 2007 after which there was a slump due to the global financial crisis.

Half of the deals were domestic deals, like Tech Mahindra's acquisition of Satyam Computers for $578 million . The other half consisted of outbound deals like the Bharti takeover of South Africa's Zain valued at $9 billion.  Outbound deals were twice the number of inbound deals. An example is US major Abbott's acquisition of Piramal Healthcare's solutions (domestic formulations) business for $3.72 billion to become the largest drug maker in India.

This was the subject of the VCCircle Dealmakers conclave 2011 last week, at which several M&A industry leaders shared their insights. The desire for acquiring competency, technology, and brand are some of the reasons for M&A. The issues of culture, integration and redundancy of resources are by-products after the deal is closed that can make or break the deal.

Although 70% to 80% of M&A fall short of their objectives, the urge to grow faster than industry is a lure for M&A. Is it vanity or sanity? According to Rajesh Sahwney, president, Reliance Entertainment, “We acquired Adlabs for a platform to scale up. It was not about their theatres, but the inside view of the industry that we wanted to get.”

Cost of capital is an important aspect in M&A. According to Rajiv Saxena, head M&A, Essar group, "We have built a strong in-house team for making due diligence. We prepare a checklist of assessments for dealing with each risk in a proactive way. The synergy evaluation analysis is important. The cost of capital has to be planned and can't be overlooked in a hurry for closing a good deal."

Bharti's Zain buy was a big outbound deal in recent times, while Reliance Communication's MTN deal did not go through. In 60% of the cases the M&A process takes over two years. According to Aditya Sanghi, managing director of investment banking, Yes Bank, "The breakdown of resistance, easing fears of job cuts/relocation and government apprehensions take time to address. The local environment knowledge is extremely important."

Dr Om Manchanda, chief executive officer, Dr Lal Pathlabs, shared an anecdote about a Delhi-based lab whose owner had been discussing about a deal with him for over a couple of years, without making up his mind. It is difficult for first-generation entrepreneurs to give up control of their own creation that can lead to uncertainty for employees.

There are various reasons why a company is open for some form of buyout by another company. There could be succession issues with the next generation not wanting to take it on. Some companies from the 1980-90s are fatigued. Others may have money, but need professional management to take the company to the next level.

A strategic buyout will bring in money, but the entrepreneur will have to give up control. The PE buyout may retain operations control with the entrepreneur and at the same time help scale up the company to the next level with operational expertise and better internal governance. According to Sandeep Naik, co-head, Apax Partners, "PE funding is an expensive option. It is one of various funding options available. It is not the best option for a company looking only for monetary reasons."

According to Gopal Srinivasan, managing director, TVS Capital Funds, "I am optimistic about domestic M&A. There are M&A opportunities in midcap sector. Pharma and auto are good target sectors. Ssangyong acquisition by M&M was a good deal. Makemytrip has been a success story."

The rise in the number of outbound deals indicates that corporate India is consolidating and at the same time aggressively working on global expansion. The domestic deals increase is encouraging and supports the argument that Indian entrepreneurs are more willing to let go of control to another Indian company in line with the Western outlook of being dispassionate in business. Inbound deals are expected to grow next year. M&A deals are becoming a big deal.

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