Ideally a slowdown should spur M&A activity. But buyers don't have too much cash and sellers may just manage to hang in there.

Push hasn’t yet come to shove,” says Ranjit Lakhanpal, managing director, investment banking JP Morgan. Lakhanpal, who like his peers in other banks has plenty of time on his hands these days, says that although valuations are becoming more attractive by the day, sellers are still not bailing out.

That’s unfortunate because the best time to go out and pick up assets is when the economy is in a mess and deals are going cheap. A recent McKinsey survey of 200 global companies, however, shows that fewer than half the companies in the segments studied made acquisitions in downturns, rather than in periods of economic growth. Significantly, more companies divested businesses in downturns rather than in upturns.

“Typically consolidation happens in a boom,” says Sanjay Sakhuja, managing director, Ambit Corporate Finance, who believes there will not be much action this year. “Even a lot of distress doesn’t always result in companies selling out because bankruptcy laws in our country are relatively weak, ” he points out, adding that if at all there’s some excitement, it would be in instances where public money is at stake and because of government intervention, as happened with Global Trust Bank.

It’s not that companies aren’t sniffing around for deals. Observes Shefali Shah, executive director and head, M&A, Rabo India Finance, “While six months back people were not even willing to talk , now they’re willing to meet and discuss a deal,” Shah feels that in this environment, it’s the seller that’s likely to blink first. Agrees Lakhanpal, “In some sectors the promoters have realised they need to sell out so as to free up capital to grow the core business but there are others who feel they can ride out the cycle. But from ‘No, Thank you,’ six months back, sellers are slowly changing their minds.”

Bankers feel that should there be a major change in the outlook for demand and supply over the next few months, transactions would fall into place. According to Dhanraj Bhagat, Partner, Grant Thornton, with companies strapped for cash, it would make sense for them to hive off unrelated businesses, free up cash and use it for their core operations. “Sectors such as pharmaceuticals and logistics may see some shakeout, possibly because these sectors have small players that might find it hard to survive the downturn,” he observes.

Many companies are also over-leveraged and there are opportunities for buyers to build up significant stakes in companies by buying out FCCBs, says Ambit’s Sakhuja, though that may not be enough to force the promoter to sell out. Even otherwise, historically, Indian promoters have been reluctant to sell out even if they are in dire straits---many believe it would amount to conceding defeat.

However, ever since the promoters of Ranbaxy sold out to Japanese firm Daiichi Sankyo last year, it’s possible other businessmen too might be prompted to sell out, says Sanjeev Krishan at PriceWaterhouse Coopers. However, in a tight money market Krishan too doesn’t expect the deal flow to be particularly strong because sellers aren’t willing to accept shares in lieu of cash, except in some rare instances such as the centurion bank of Punjab merger with HDFC Bank.

“Not too many people have cash to spare so buyouts are difficult. But there could be some mergers though,” he says. Rabo Bank’s Shah too believes that chances of deals fructifying on the basis of share swaps are unlikely. In fact, at these prices, companies aren’t willing to part with stock which is one reason why even private equity players haven’t been able to do too many deals. However, if things get worse from here on, sectors such as auto ancillaries, says Sakhuja, could see consolidation. Adds Shah, “It depends on how long and deep the slowdown is, but we could definitely see more term sheets being exchanged.”

If there’s one space though that could see action, and lots of it, it is technology, says BMR Advisors which sees consolidation whether through strategic tie-ups, partial divestments, mergers or outright acquistions. “The availability of capital, while marginally lower than before, is still adequate to fund a very large increase in M&A activity,” says the team at BMR, adding that lower prices will make deals very attractive for buyers although targets will hold out until their coffers are dry or the offers become too attractive. The share of IT deals actually went up in 2008 –among the bigger buyouts HCL Technologies bought out Axon after Infosys gave up on it. The sector may well hog the limelight this year too.

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