Indian companies are most active in globally

The last couple of years have seen heightened activity in the mergers and acquisitions space involving Indian firms. Low-cost operating environments in India and strong balance sheets with potential for leveraging, make Indian firms ideal acquirers even in international markets. With the recent high profile M&A deals like Tata Steel’s $8 billion acquisition of the Anglo-Dutch firm Corus, Vodafone’s purchase of India’s second biggest privately-owned mobile phone service provider Hutchinson-Essar and many others in the making, the new buzzword for India Inc. seems to be Mergers and Acquisitions(M&A).

There have been a number of studies that throw light on the growth in activity and the dominant sectors. However, the need of the hour is to understand the challenges, drivers, capabilities of players and the consequences of this fast growing phenomenon.

Opportunities multiply as they are seized says a military General and strategist. He could not have been more accurate in the context of the current status of M&As in the Indian market. In the past few years, leading Indian companies have made enormous strides in acquiring businesses abroad, signaling a new level of participation in the global space. There is no doubt that India Inc. has arrived and is attracting attention the world over. India’s economic growth with a rapidly increasing middle class and a large English-speaking work force has made it an unbeatable destination for foreign investors.

M&As have seen tremendous growth in the last four years both in terms of value of deals and volume resulting in a 47% CAGR (compounded annual growth rate) in terms of volume – among the highest growth world-wide. The year 2007 saw the total number of deals rise to 1000 (M&A and private equity (PE) put together) compared to 782 in 2006 and 467 in 2005.

The number of multi-billion dollar M&A deals has risen to seven in 2007 from none in 2006. Five of the seven deals were in the infrastructure and power/energy sectors, which is not surprising because of the sheer size of the projects.

Infrastructure is the weakest link in India’s growth story and development in this sector will continue to be buoyant. Also reflective of a maturing M&A market is the significant rise in value – 51% CAGR over the last four years, indicating the increased use of the inorganic route to fuel growth.

Also, the number of cross-border deals continue to outnumber domestic transactions. In February 2008 alone, there were 17 domestic deals, wherein both acquirer and target companies were Indian with an announced value of $2.47 billion and 19 cross border deals with an announced value of $0.47 billion. A further analysis of cross border acquisitions reveal that there are more outbound (Indian companies acquiring companies out of the country) deals than inbound deals both in value and volume terms. One of the biggest deterrents for inbound deals, apart from government restrictions in FDI in certain sectors, has been the significant increase in the valuations of Indian companies (in the rare event that an Indian promoter decides to sell).

The preferred target markets by-and-large are North America (38% of deal value in 2007) and Europe (52% of deal value in 2007). Language and familiar legal systems make Anglo-Saxon countries more attractive for acquisitions.

Sectors like IT, automotive, pharma and banking were the initial fore-runners in M&A, but 2007 has seen significant participation in sectors such as commodities, telecom, power and energy. IT and ITes is the clear leader in volume proportion with 23% share of the total number of deals.

One of the main reasons for this is IT and ITes companies have stronger cash flows which enable them to fund their inorganic plans effectively and second, they require acquisitions to add to their niche capabilities. In terms of deal value, steel and telecom are the clear leaders and accounted for more than 51% of the total Indian M&A 2007 deal value. Here again, the sheer size of the projects account for the high value and lower volume. Alongside, the private equity landscape is growing extensively.

There are over a hundred (and counting) PE houses in India that have substantial funding bases. PE investments in India have sky rocketed, making India one of the hottest destinations for private equity markets.

Real estate and infrastructure management continue to be a private equity favorite.

While Indian M&A’s have seen unprecedented growth in all aspects, it still forms a small percentage of the global picture. However, we expect continued growth in 2008 with increased focus on cross border deals and diversification of sectors.

Infrastructure will continue to be at the forefront of deal making, be it PE or M&A, as development in this sector is the need of the hour. Some sectors like automotive and engineering are expected to see increased activity as over-leveraged PE funds start exiting investments on the back of the current liquidity crunch in the US. While India’s high GDP growth rate at 8.4% as of the 4th quarter makes it is a haven for FDI investment, be it in the form of PE investments or M&A, this increased activity in the last 2-3 years in itself acts as a catalyst to economic growth by providing increased scale and bringing new opportunities to Indian promoters .