The recent spate of mergers between giant companies with an Indian connection Mittal-Arcelor, Vodafone-Hutchison, Tata-Corus has woken India up to the heady world of high finance. But the phenomenon was not limited to India. In fact, 2006 will go down in history as a record breaking year in terms of worldwide merger and acquisition (M&A) deals.
Over $3.8 trillion worth of deals were struck, according to Thomson financial, a leading financial consultancy firm. This represents a 38% increase over the pervious year. It overtakes the pervious record of $3.4 trillion reached in 2000, fuelled by the dotcom boom. Nearly 37,000 deals were hammered out globally in 2006, of which 157 were hostile takeovers, worth just under $500 billion.
After the high-water mark in 2000, there was a slump in M&A activity following the dotcom bust. However, it stated picking up in 2003 and has been continuously rising in volume. For India, too, 2006 was a mega merger year â€“ there were 1,164 valued at $35.6 billion compared to 1,011 deals worth $21.6 billion in 2005.
So, whatâ€™s fuelling this merger mania? In an increasingly competitive world, as companies reach saturation point in marketplace, the only way to increase profits is to take over competitors and cut costs can be achieved by mergers & acquisitions. However, to be able to buy out, money is needed. This is where the high levels of accumulated profits come in handy. Interest rates are at low levels which mean loans can be raised easily.
Giving this process a power kick are private equity or venture capital funds. These are huge funds held by private investor groups looking to invest in lucrative deals, making a quick buck and selling out. Estimates put private equity holdings worldwide at nearly $700 billion and growing fast.
In 2006, nearly 20% of the deals were backed by these private funds, up from 12% in 2005. Even in India, which is relatively a small player in the world of high finance â€“ private equity or venture capital funds are estimated at $7.46billion in 2006, more than three times 2005.
For cutting costs, the most common measure is job cuts. Job cut data in the US indicates over 0.6 million jobs were cut in 2000 and over 1 million in 2005. In 2006, the trend appeared to slow down, with 22% decline in job cuts.
An ILO report in 2001 had collected worldwide data to show that job cuts were natural fallout of M&A due to inherent neglect of human factors. M&A deals are 26% more likely to be successful if they paid satisfactory attention to cultural issues.
However, hope is held out by a research done by McKinsey & co. They compared share prices of two merging companies two days before and two days after the merger and found that there was a 10.6% increment in value created in 2006, compared to a 5.6% increment in 2000. It also calculated that the perception of acquirer sweetening the deal by overpaying was 57% in 2006 compared to 73% in 2000.
The trend of consolidation of corporate companies continues there is hope for less job losses and better performance. The volatility of private equity funds is in the game only to make profits. If commodity prices fall or interest rtes rise or growth slows down or even if the markets get spooked by these fears the hot money may evaporate and the tailspin may begin.
Some interesting figures at â€œDeal Streetâ€?:
Year————————M&A Value ($ Million)