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Mergers and acquisitions (M&As) hit a six-year low in the first half of 2015 at $14.1 billion worth transaction, according to Thomson Reuters. If it was not for corporate restructuring and private equity (PE)-led transactions, it would have been even worse. Rainmakers say their only hope for strategic acquisitions depend on US companies, which are now flush with cheap fund.
“While secondary capital markets have done well with the optimism of the new government coming in, companies are taking much longer to repair their balance sheet, so their growth is still anaemic,” says ace investment banker Vedika Bhandarkar, who has deals such as Tata Motors’ $2.3-billion acquisition of Jaguar Land Rover to her credit.
Two of the top three deals of the first half, including $2.1 billion merger of Cairn with parent Vedanta, and $817 million merger of Madura Fashion & Lifestyle with Pantaloons Fashion are an attempt in restructuring. Suzlon Energy’s sale of European subsidiary Senvion SE to Centerbridge Partners is an attempt to repair the balance sheet through asset sale, which led to a PE transaction.
“This year we are expecting more deals to effect restructuring of corporate balance sheets and continuity of assets sales for capital raising,” says Rashesh Shah, chairman and group chief executive Edelweiss Financial Services. But it is the absence of big bang acquisitions such as last year’s Sun Pharma’s $4 billion acquisition of Ranbaxy that is troubling bankers.
The outbound M&A activity declined 43.3 per cent in the first six months of the year to less than $1 billion with the largest outbound deal for the year being $208 million acquisition of Aspen’s Australian assets by Strides Acrolabs. The situation is not expected to change soon as a lot of corporate balance sheets are still stretched.
Bhandarkar, who is on gardening leave and was till last year heading investment bank at Credit Suisse in India and had earlier led J P Morgan’s investment banking division in the country, says, “The companies in the US are in acquisitive mode, but they are waiting for a few sustainable quarters of earnings growths in India and watching that there are no negative surprises on regulatory front before they start investing in full throttle.”
The largest interest in Indian M&A seems to be currently coming from abroad, specifically the US where the cost of fund is low. Inbound acquisitions grew 23.4 per cent to $7.1 billion in the first six months of the year. The US is currently the top acquirer of Indian companies in terms of value and number of deals with $2.9 billion from 60 announced deals, and accounted for 40.5 per cent of India’s inbound M&A activity. This includes Mylan Laboratories’ acquisition of women health business of Mumbai-based Famy Care in an $800-million deal.
“We are seeing a pick-up in interest from international corporates in pursuing strategic acquisitions in India,” says Harish Hulyalkar, director, M&A, Citi India.
Health care, technology and financial services are some of the sectors where Citi is expecting high growth potential for M&A as these are driven by Indian consumer demographics and are less dependent on regulatory policy changes.
“Their cost of capital continues to be low and they have greater confidence in the India growth story. Besides, the private equity investors are also seeking to do larger deals in India and are ready to allocate more capital,” says Hulyalkar, who is optimistic about inbound deals to improve Indian M&A business.
The rise in PE transactions are attributed to peak minority stake investments made by these funds in 2007-08, which are already seven to eight years old now. So the PE funds are desperate to exit which has led to secondary sales boosting the number of M&A transactions. Besides IPOs are a possibility now after a gap of four to five years and that has boosted sentiments for PE investments as well as exits.
