M&A deals continue to shrink in 2013

Outbound deal count in the current calendar year fell to 100 from 154 in 2012

The merger and acquisition (M&A) transactions — in terms of value and volume  both— continued to shrink in 2013, as slow business growth, uncertain macroeconomic environment and volatility in foreign exchange rates turned Indian entrepreneurs into cautious acquirers. The regulatory environment and upcoming general election has also kept foreign investors in a wait-and-watch mode leading to a decline in inbound M&A deals.

In 2013, between January and November, there were 708 M&A transactions involving Indian companies. The deals amounted to $23.9 billion. In comparison, there were 904 M&A deals amounting to $27.9 billion in 2012, and 907 transactions involving $32.1 billion in 2011.

The outbound M&A deal count in the current calendar year fell to 100 from 154 in 2012. In the domestic market, there were 422 M&A transactions in 2013 compared to 504 a year earlier. The deal value of domestic M&A transactions fell sharply to $3.8 billion in the first 11 months of this year from $14.5 billion in 2012.

“Outbound and domestic M&A deals have slowed down mainly because Indian entrepreneurs have been cautious acquirers of late. This is because of the slow growth in the Indian economy and the large debts on the books of Indian companies, which is shifting their focus more towards consolidation and debt reduction rather than growth through acquisition,” Ajay Arora, partner – transaction advisory services and head of M&A at Ernst & Young in India, said.

He added that the devaluation in the Indian rupee has also made outbound M&A deals more expensive than last year.

There were 186 inbound M&A deals in 2013. A year earlier, there were 246 inbound M&A transactions. “While many global companies have been evaluating opportunities in India, they are still in a wait -and-watch mode. They are awaiting clarity on the regulatory environment and on the growth front before closing large transactions,” Arora said.

While there were fewer inbound and outbound activities in 2013, a few mega deals resulted in higher transaction value. For instance, inbound M&A deals amounted to $11 billion in the current calendar year compared to $6.8 billion in 2012. Similarly, outbound deals amounted to $9.2 billion in 2013 compared to $6.6 billion a year earlier.

Industry analysts and bankers also remained hopeful that inbound and domestic M&A activities, including private equity (PE) transactions, will pick-up in the second half of next year.

“My sense is there will be a pick up in M&A activities in 2014. We could have more political certainty than now, and that will allay some of the concerns of international investors. Also, I expect the Indian rupee to stabilise. So, two major uncertainties could get out of the equation,” Amit Bordia, head of corporate finance at Deutsche Bank in India, said.

He added there is increasing willingness among Indian promoters to offer controlling stakes, as assets are put on the block. “This will translate into more inbound M&A activity. On the PE front, both entry and exit are being thought of as meaningful options, by different players, who are in various stages of their investment cycles for India,” Bordia said.

Arora echoed a similar view. “It has been a slow year for PE players. But with many of them having 'dry powder' to invest and the pressure to exit some of their older investments is likely to pick up PE deals in 2014,” he said.

Outbound transactions, however, will probably continue to remain slow in the near-term.