Even as the BSE Sensex has gone up nearly 20 per cent in the first quarter of CY2012, deal-making activity has shown signs of slowdown across mergers and acquisitions (M&A) and the private equity space. In contrast, exits are on the rise on the back of market rally even as regulatory issues continue to worry foreign investors.

According to early numbers from VCCEdge, the financial research platform of VCCircle, M&A deal volume has fallen 24 per cent during this period while PE deal volume has declined 7 per cent. But the fall is much more significant when deal value is taken into account. The M&A deal value has shrunk 83 per cent to $3.75 billion, compared to 22.24 billion during the same period in 2011. Private equity deals have seen a year-on-year fall of 24 per cent to $2.08 billion.

Merger & Acquisition

The fall in M&A deal-making activity comes on the backdrop of increased uncertainty in global economy and increased policy paralysis in India. The number of deals fell from 205 in Q1 CY11 to 156 in Q1 CY12. Also, the sharp fall in value of M&A transactions was due to the lack of bulge bracket deals in comparison to last year.

Among the top five M&A transactions, there was not a single deal above the $1 billion mark. The largest deal came when Piramal Enterprises doubled its stake in Vodafone India for $611 million. This was followed by Strides Arcolab selling its subsidiary Ascent Pharma Health to NYSE-listed Watson Pharmaceuticals, Inc. for $393 million.

The significant fall in deal value comes as Q1 CY12 has been a record quarter for deal-making, with Reliance Industries Ltd selling stake in 23 oil & gas production sharing contracts to British Petroleum (BP) for $7.2 billion and Vodafone consolidating its holding in the India arm for $5.4 billion.

Private Equity

The drop in private equity deal-making is not that significant as the deal volume has only fallen 7 per cent. However, deal-making becomes tough in a volatile stock market. The number of PE deals fell from 138 in Q1 CY11 to 128 in Q1 CY12.

The fall in value is due to a single deal in Q1 CY11 – Bain Capital and Singapore sovereign wealth fund GIC’s $850 million infusion in Hero Investments & Bahadur Chand Investments to help buy 26 per cent stake in Hero MotoCorp, India’s largest two-wheeler manufacturer.

Healthcare has seen a rising interest from PE firms though, with Tamil Nadu-headquartered eye care chain Vasan Healthcare and Kochi-based hospital chain DM Healthcare raising $100 million and $98 million, respectively. Another large deal came in the consumer space as Singapore’s sovereign wealth fund Temasek picked up stake in Godrej Consumer Product for $135 million.

Exits On The Rise

With capital markets moving up, there was a significant rise in private equity exits. The exit volume increased 25 per cent to 40 deals while the value nearly doubled to $1.54 billion. The largest exit came when Warburg Pincus completed its exit from private sector lender Kotak Mahindra Bank, selling its remaining stake for over $443 million during this quarter.

Among other large exits, Carlyle made a part-exit from India’s largest mortgage lender Housing Development Finance Corp (HDFC) and Temasek sold half its stake in the country’s second largest lender ICICI Bank.

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