While India has emerged as a must-be-present market for scores of mid-sized companies in the US, the cross-border deal activity between the two nations appears to be driven by India Inc’s ravenous M&A appetite. The defining features of the Indo-US cross-border M&A deal trends are attitude shifts, necessity-based deals particularly in energy and innovations at the deal table. In an interview with VCCircle, Anil Kumar, Managing Director, IMaCS Virtus Global Partners, a joint venture between an arm of credit rating agency ICRA and New York-based advisory firm Virtus Global Partners, talks about the cross-border deal-making environment and emerging M&A trends between Indian and US firms. Excerpts:-
What is the current trend in India’s outbound deal-making?
India is witnessing a growth phase in its deal-making ventures with the US. In the first quarter of 2010, there were eight acquisitions by Indian companies in the US and over 16 investments into India by US companies. Last year, Indian companies made a total of just 15 US-bound acquisitions with a cumulative transaction value of over $300 million. Today we see a significant increase in energy-related investments such as Essar’s acquisition of Trinity Coal for $600 million, IFC’s investment in renewable energy company Auro Mira, and Reliance deal with Atlas Energy for stake in Marcellus Shale natural gas operations. The size and scale of investments between the US and India is expected to increase this year. Signs are clear that India is ready for a sustainable outbound deal-making trend.
How does the current trend compare with the past year’s deals?
The current deals trend seems to be born out of business necessity particularly in the energy and pharma sectors and is backed by strong internal capital market. Last year the number of deals decreased by 75% at 62 transactions in 2008 and deal value declined by 90%. Lack of funding amidst the credit crunch in the West was the main reason. Compared to three $1-billion plus deals in the first three quarters of 2008, last year’s transaction sizes were much smaller. Except for S Kumar’s acquisition of Hartmax, all other transactions were less than $50 million in value. Low valuations, bankruptcy auctions, and distress sale characterized over 50% of the US-bound acquisitions by Indian companies in 2009. With the US economy also showing signs of recovery, the current Indian trend is expected to be sustainable with strong growth in cash reserves compelling more acquisitions.
Which are the sectors that would drive deals in 2010?
Power generation companies will look outside for supply of quality raw material. Steel companies will settle for outbound M&A. Information technology remains the dominant theme for Indian companies acquiring US assets. As a target location, the US has traditionally lagged behind Europe in pharmaceutical outbound acquisitions from India. However, this could change based on the upcoming generic opportunities and size of the US market.
What kind of funding patterns do you see evolving in the deal-making activity?
Much of the deal funds this year will be from the Indian market. Indian capital market is doing really well and the liquidity is high. The robust growth is good enough to offset the lack of external borrowings. The fundamentals are strong that should further accelerate the growth of the capital markets. The ECB market in Europe or US is definitely a constraint with the total recovery of global markets still underway. It would be nice if the pension market reforms come through at the earliest in India. This would release huge funds into the capital market, if done at the right time, the number of outbound deals from India will increase manifold.
How long do you expect the current lower valuation of US companies to continue?
While talks of economic recovery is in the air, a complete recovery is yet to happen in many sectors in the US and Europe. Even with the current optimism, the market expects a one-year window for the distress sale to be available in the technology and financial sector.
Have the trends in the deal-making process changed over years? What are the equations at a deal table?
Quite a lot of innovations are happening at the deal table. Indian entrepreneurs have started looking at decisions that allow manageable risks creating a situation for favorable deal-making. Years back what used to be a bargain for majority stake in deals is not true now. Taking new economic realities into consideration, transactions involving minority stakes, joint ventures and earnouts are evolving. This is evident in Infosys BPO’s acquisition of McCamish and KPIT Cummin’s acquisition of Sparta Consulting. This sort of arrangement makes deals actually come through. The nature of tie-ups is also changing. Indian companies are seeking more collaborations than acquisitions focused on majority stakes.
What is the US industry perspective on investments into India?
India, China and Brazil are economies being watched by global entrepreneurs. The India growth is catchy and convincing at present with high return on investment promises. The comfort factor is high on the Indian equity market. Mid-sized companies with revenue between $500 million and $5 billion target India as a must-grow market. The recession has made them realise that the future growth is from India. We have seen the entry of bigger companies like IBM, Honeywell or GE in the past years, now it will smaller or mid-sized companies in the manufacturing and energy sectors.