Explained: Why M&As are rising in India & how can investors benefit?

Reports suggest LTI & Mindtree could be eyeing a merger. Besides, the acquisition race for Holcim's India assets is heating up Ultratech Cement reportedly throwing in its hat in the ring

Tesla Inc chief Elon Musk is set to acquire micro-blogging site Twitter for about $44 billion. Back home, India Inc, too, is seeing aggressive merger and acquisition (M&A) activity with PVR-Inox and HDFC-HDFC Bank announcing their mergers recently.

While Axis Bank recently acquired Citi India’s India retail business, reports suggest Larsen & Toubro Infotech (LTI) and Mindtree could be eyeing a merger. Besides, the acquisition race for Holcim’s India assets is heating up with Ultratech Cement, Adani Group, JSW Group, and Shree Cement reportedly throwing in their hats in the ring.

Experts say the trend underlines India Inc’s cash-rich companies’ desire to expand and eye inorganic growth amid return of normalcy post the coronavirus pandemic.

"A lot of companies went for cost cuts to reduce overheads and increase efficiency in 2020, which led to a high availability of cash with these companies. Meanwhile, in 2021, people started investing in growth. So, both from a mindset perspective and funds perspective, companies are ready for growth," said Dinesh Arora, Partner & Deals Leader at PwC India.

He added: On the supply side, a lot of companies were not able to improve their situation after the onset of Covid-19. They now want to get out of the business or find an entity to take over the business.

M&A activity hit a four-year high at $30.3 billion during January-March quarter of 2022, bucking the global trend where deal-making fell sharply, says a report by Refinitiv.

Deal activity grew by 5.6 per cent year-on-year in value terms in Q1CY22, making it the highest first-quarter period since 2018 when it was $31.1 billion. In volume terms, the M&A activity grew 29.6 per cent YoY, making it the best-ever quarterly number.

Moreover, M&As involving domestic companies stood at $23.7 billion, down 8.3 per cent on year. Domestic M&As declined 24.5 per cent to $12.1 billion, and inbound M&As grew by 17.9 per cent to $11.6 billion, which is the highest first-quarter period since 2017.

Bimal Modi, Partner at Deloitte India said India Inc’s strong strategic intent, favorable regulatory interventions as well as the hunger to scale and rise is boosting the M&A activity.

"According to our latest global 2022 M&A Trends Survey, 92 per cent of respondents expect deal volume to increase or stay the same over the next 12 months, while 54 per cent of responding dealmakers think the tightening regulatory environment will spur more deal activity, as they race to beat the implementation of more challenging obstacles," he added.

Going forward, experts say the trend will continue in 2022. "We could see a number of acquisitions driven by larger corporates in India and this is a theme which will continue. That apart, there are unicorns which are relying on M&A to propel their growth. So that is the second set of serial acquirers you would see in the market," highlighted Arora of PwC.

Shareholders' interest

According to experts, investors looking to gain from mergers and acquisition need to assess the reasons and long-term benefits from the deal.

"Mergers done purely for defensive reasons and as a last resort will fail to create shareholder value. Therefore, investors need to be very careful in assessing the reasons behind a merger and the potential upside. Our view is that short-term traders, looking to benefit from merger announcements, will be disappointed as most of these mergers are value accretive only in the long-term. Any short-term price arbitrage vanishes very quickly in an efficient market," said Abhay Agarwal, founder and fund manager at Piper Serica.

Amit Tandon, founder and managing director of IiAS (Institutional Investor Advisory Services), too, said that shareholders were positive about the recently announced mergers and were valuing them on a case-to-case basis.

That said, Ram Kalyan Medury, founder and chief executive officer at Jama Wealth cautioned retail investors against jumping into each consolidation.

"The key to a successful merger is the existence of synergies and a fair valuation. Every deal needs to be looked at individually. While initial stock moves post the announcement of a merger are probably good news for traders, investors need to digest all details and take an informed view," he suggested.