04 Jan 12 The 2011 Indian M&A chronicle – ‘India growth story’ stumbles

‘Spending the 31^st night at home for the first time since the last 10 years’ – This was the latest Facebook update of one of my friends who works with a mid-sized investment banking boutique firm in Mumbai. The poor guy had just been retrenched by his employer citing weak business. If you look at the last one year (from Jan-Dec 2011), the M&A activity in India definitely reiterates his employer’s sentiments.

According to the ISI emerging markets database the calendar year 2011 saw M&A deals in India fall by more than 50% over the last year, as only 195 deals were announced.  Compared to this nearly 400 deals were announced in the calendar year 2010. Even the net deal value fell to ~USD 18bn as compared to ~ USD 45bn in the previous year.

The biggest deal of the year was British Petroleum taking over 30% stake in 23 oil and gas blocks of Reliance Industries Limited for an aggregate of USD 7.2bn, followed by Tata Steel selling its 26% stake in Australian miner Riversdale to Rio Tinto for USD 1.1bn. Other big deals included Bain Capital and GIC, the investment arm of the Government of Singapore buying a 30% stake in Hero Investment (P) Ltd, which owns 17% of Hero Honda Motors for USD 0.8bn and Piramal Healthcare purchasing ~5.5% of the issued equity share capital of Vodafone Essar Ltd from ETHL Communications Holdings Ltd for a cash consideration of USD 0.6bn.

Out of the total deals announced this year, 95 were domestic deals amounting to a deal value of ~USD 4bn, 38 were outbound deals where Indian companies acquired a foreign target (deal value ~USD 3.5bn) while 50 inbound deals saw Indian companies being acquired by foreign firms (deal value ~USD 10.5bn). Biggest decline was in inbound deals where they fell by ~65% in comparison to the last year.

Deal breakers

As the actual performances have tended to swerve from the projections estimated by the companies and Investment bankers before the start of the takeover transactions, buyers are getting more and more jitterier and due diligences have become much more rigorous. Because of this M&A deals are now taking much more time to conclude.  The Sensex has declined by nearly 20% this year, as FIIs sold USD 500m worth of Indian equity. The economic growth estimate by the Government has been pulled down to around 7.5% from earlier projections of 9%. Even the Indian rupee has fallen by more than 15% since June 2011 making outbound deals a challenge. The debt crisis in Europe, along with the US financial woes has also cast its gloom on the Indian markets. To add to it the current high interest rates in India are making, funding an acquisition very difficult. All these factors are really compelling the players to adopt a wait and watch policy.

Fingers Crossed for 2012

Looking at the current scenario, I think we’ll really have to keep our fingers crossed for the next year. While some courageous mid-sized Indian organizations might still scout around for small strategic overseas buyouts, the next year could see most Indian companies cutting back on overseas acquisitions (Thermax and Marico have already postponed their M&A plans). And as there will be uncertainty in both the outbound as well as inbound markets, the coming year could see a fair amount of increase in the percentage of domestic deals. But we will continue to see some amount of interest in inbound deals in the next year as the western world continues to be seduced by the ‘India growth story’ and for most of them the option of not being in India does not really exist!