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Financial Crisis & The Changing Dynamics Of Indian M&A

22 June, 2009
Deal activity across the world was weak in 2008, attributed primarily to the over-all economic slowdown, caused by the global credit crises.  While the number of “announced” deals across the globe went up from 37,324 in 2007 to 38,764 in 2008, the deal values declined sharply – from $4,857 billion in 2007 to $3,383 billion in 2008.  This trend continued in 2009, with announced deals of $482 billion reported during Jan to March 2009, compared to over $829 billion in Jan to March 2008.   
The situation in India was no different, as over-all announced deal value declined from $56 billion in 2007 to $30 billion in 2008.  In volume terms, Indian companies were involved in over 570 deals in 2008, compared to around 680 deals in 2007.  Notably, in value terms the top 10 deals in 2008 accounted for over $16 billion of deal value. 
As is typical in a boom phase, companies expand into a number of businesses, some good some not so good, often in the hope of improving their over-all market capitalizations, which in turn may also help them in their finance raising efforts.  
The macro-economic slowdown is forcing corporates to acknowledge that they may have gone too far too fast, both in terms of the businesses they acquired and the price paid for them.  Several Indian companies are now back to their drawing boards, developing alternative strategies for some of the acquisitions they completed in earlier years.  
These include potential divestures of whole / part of such acquired businesses, in an effort to save their core businesses.  Examples of such efforts to re-organise operations with a view to re-focus on their core businesses include the following: 
Suzlon acquired industrial gearbox producer Hansen Transmissions in 2007 for $545 Million, but is now contemplating the sale of its entire holding; Shakti Group was involved in one of the largest outbound acquisition in 2007, when it acquired auto component business in Europe.  The group’s subsidiaries in UK and Germany have now filed for bankruptcies.
JSW Steel is reportedly contemplating sale of their manufacturing plans in US, which they acquired in 2007 for US$ 800 million.
Divesture of the telecom business by Unitech Limited and Wockhardt’s planned divesture of a number of its businesses, are other examples.
Acquirers in 2008 were much more cautious, unlike the past, when good money was chasing a few deals, underpinned by optimistic demand forecasts and sky-high valuations.  For most part even the cash positive strategic acquirers adopted a wait & watch approach, focusing only on deals which had a compelling investment strategy.
Financing remained a challenge for all players, as a result of which businesses chose to defer acquisitions and expansion and conserved their resources instead – both cash and management bandwidth.   
Distressed asset transactions played an important role in 2008 M&A activity and interestingly, Indian companies were actively engaged in evaluating such opportunities. 
Factors such as lower demand and volumes, eroding customer confidence, over-capacity and volatile cost base impacted industries across the globe, and resulted in strong distressed deal flows, a trend which is likely to continue in 2009.  This is evident from two very recent deals involving Indian companies, both of which were announced in early 2009: 
Motherson’s acquisition of Visiocorp, a company in administration in UK, for US$ 31.6 million, to emerge as one of the largest manufacturer of automotive rearview mirrors globally. 
Apollo Tyres’ acquisition of Vredestein Banden, a company in administration Netherlands, to gain entry into the European market. 
These were invaluable opportunities for both Motherson and Apollo, to buy good international companies which ran into trouble not because of poor products or technology or customers, but due to some operational issues, excessive leverage & over-expansion.  In both these deals, the Indian acquirers displayed their ability to think on their feet, quickly execute the deals, meet the accelerated (and very short) deal timelines set by vendors, and complied with complex regulatory & legal requirements. 
Looking forward, M&A activity in India in the remainder of 2009 is likely to be impacted by a variety of factors. 
The economy is now looking up, with India’s real GDP growth rate during 4th quarter FY 2008-09 at 5.8%.  Agriculture, which had negative growth rate in third quarter, has comeback in black in the 4th quarter. Services, the driving factor of our economy, posted a healthy 8.6% with financing, insurance, real estate and business services posting a growth rate of 9.5%.
Although some concerns remain with the manufacturing activity, which exhibited a negative growth rate of 1.4% YoY, the month on month Index of Industrial Production has started showing an upswing. Indicators such as production of commercial vehicles, cement dispatched and domestic steel prices have all started showing positive trends March 2009 onwards.  
Operating results declared by companies for year ended 31 March 2009 were not as bad as expected whilst those for quarter ending 30 June 2009 are likely to show some (though limited) improvement.
The resurgence in domestic demand and the performance of Indian companies in recent months has comforted lenders and banks, easing some of the financing pressures of late.  The improved economic outlook along with an assurance of political stability has also ignited hopes of the tide coming back into the capital markets.  
PE interest seems to be rebounding, with close to 30 deals (across sectors) announced in the month of April and May 2009, although most of PE investments in the near term will continue from existing & proprietary funds, rather than from new fund raising initiatives. 
In summary, possibility of return of liquidity and credit in the Indian market along with the continued uncertainty faced by global companies indicates that in the remainder of 2009, there could be interesting outbound acquisition opportunities for Indian companies.
 The government’s stimulus package and continued focus on infrastructure will also generate opportunities.  Buyers, however, need to remain cautious and deeply focused, such that each situation (whether distressed or otherwise) is rigorously evaluated, such that the ghosts of 2007 do not return to haunt them.  
Realistic valuations, understanding the real cost base, addressing capacity utilization issues, evaluating market demand, assessing cash requirements, resolving operational inefficiencies and negotiating workable deals with existing suppliers / customers will be extremely important in the next few quarters, for the deal activity to rebound. 
Sanjeev Krishan, Executive Director and Mohit Chopra, associate director, Transactions Practice, Pricewaterhouse Coopers


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1 Comment
Labanya Prakash Jena . 6 years ago

Most of the M&A activities occur during the time boom when every asset looks attractive. Past M&A data suggests data companies pursue M&A during boom and pay excessive price for those assets, amortize their assets after the boom.

Financial Crisis & The Changing Dynamics Of Indian M&A

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