We are in the midst of a monumental shift of economic activity from the ?developed? world to the ?developing? world. Those words will lose their meaning as the shift gathers momentum; instead we will need to think in terms of the ?low growth? world and the ?high growth? world. Meanwhile the nature of global M&A activity, and Indian M&A activity in particular, is changing.
Big ticket overseas buys by Indian corporates will be rare. Instead Indian companies will look to the domestic market for acquisitions. When they venture overseas it will be increasingly to other high growth developing markets. Cross border deals into lower growth developed markets like Europe and the US will continue to take place, but average deal sizes will be smaller.
The big ticket M&A deals like Corus, Jaguar/Landrover, Novelis look like bull market phenomena unlikely to recur consistently across the economic cycle. With the world economy in recession, smart companies will focus their acquisition activities on pockets of growth. With the IMF forecasting the Indian economy to grow 5.4% in 2009 against a global contraction of 1.4%, where better for Indian companies to look for acquisitions than their own backyard?
Recent data show a clear shift in Indian M&A activity to the domestic market. In this first half of 2009, according to Mergermarket, domestic deals accounted for three quarters of all India related M&A, up from less than half in 2007 and 2008. As long as the US and Europe remain in recession, this trend is likely to continue.
Domestic Indian acquisitions are part of an overall trend toward Indian acquisitions in developing countries, driven by stronger trade links and more favourable growth prospects.
Developing countries are buying more goods from each other, and relatively less from the developed world. China has now surpassed the United States as both India?s and Brazil?s largest trading partner. As trade increases, commercial links will bring Indian companies into contact with their suppliers, distributors and direct competitors in other developing markets, all of whom become potential acquisition targets.
It is telling that the biggest potential Indian M&A deal in the pipeline is Bharti?s proposed tie-up with Africa?s MTN. In a variety of other sectors as well, from power equipment to consumer goods to financial services, Indian companies are looking for inorganic growth in Africa. Why the Indian interest in Africa? The Africa growth story of the coming years is a familiar one to Indians: they have lived it themselves. Governance problems aside, Africa today is in the position India was in the 1970s and 1980s: enormous potential, but also enormous barriers to realising that potential. Overcoming these barriers presents enormous business opportunities, and Indian companies know it.
Apart from Africa, Indian companies are looking to East Asia, the Gulf and even Latin America. With a preponderance of large state-run enterprises, China today offers relatively few acquisition opportunities in comparison to its size. As India-China trade rises and the Chinese economy liberalises further, M&A deals between China and India are inevitable.
The stark realities of the new global growth map require Indian companies to exercise greater discipline in evaluating acquisition opportunities in markets like Europe and the US. Low growth makes acquisitions in those regions more risky. Indian companies must focus on ways to mitigate that risk, without shutting the door on attractive acquisition opportunities in these markets. The best way is to target smaller companies that will add less than 20% to the acquirer?s turnover; deals this size pose less integration risk, and less financial risk if the expected synergies do not materialise. In addition, prudent Indian acquirers will approach developed market deals with the objective of filling a clear gap in their product or technology profile, rather than undefined notions of becoming a global player. Europe in particular has a number of small, family owned companies that have focused on developing great technologies for niche markets. Acquiring such companies can be a growth accelerator for Indian companies, without the downside risk of a big deal.
In the coming decades the race for growth, market share and profits will take place in the developing world. Indian companies, blessed with a large, fast growing domestic market, have an enormous strategic advantage. The smart ones will cement their advantage through focused acquisitions at home and abroad. We will see fewer Indian companies doing deals to double their size overnight, and more doing deals to position themselves for long-term sustainable growth. For India Inc. this is a positive change indeed.
The author is Global Head of M&A and Private Equity at Elara Capital Plc