With cross-border mergers and acquisitions (M&As) becoming a fundamental characteristic of the global business landscape, the crash of the US financial and investment banking sector is likely to take a toll on big ticket M&As by Indian companies.
Riding on cheap credit and attractive valuations, many Indian companies had found the inorganic route more lucrative to scale up their operations and tap new and emerging markets. But now with the credit crunch in the global market, Indian companies would find it difficult to mobilise funds for large acquisitions.
In fact, latest data shows that the total value of M&A deals in the first eight months of this year is $22.74 billion, spread over 346 inbound and outbound transactions. Last year, during the same period, there were 456 deals amounting to $48.2 billion. However, this value was skewed due to three huge deals: Tata-Corus, Vodafone-Hutch and Hindalco-Novellis.
Even the average size of deals in the first eight months of this year is lower at $23.4 million, compared with $70.5 million level seen during the same period last year. Global private equity (PE) players who were the main drivers for M&As funding for the past couple of years, have taken a backseat this year. In the first eight months of this year, private equity companies have invested $8.69 billion in 246 deals. Last year during the same period, they invested $10.74 billion in 260 deals.
Apart from the slowing global market, even in the domestic market, companies are finding it difficult to mobilise funds for acquisitions. Coupled with Reserve Bank of India?s strict credit and liquidity norms, as the bank has successively hiked the Repo Rate and Cash Reserve Ratio, are playing a dampener for companies to raise funds for new acquisitions. Though not many Indian deals are funded out of debt from banks in India, if they borrow at higher interest rates, it will surely affect their bottomline growth.
But every adversity brings in an opportunity to be tapped. The slowdown can help strategic acquisitions and companies can synergise production and scale up their business. With the slowdown in the US economy, exchange loss issues and valuations in the global stock markets coming down, there is a large difference between the bidding and asking prices for acquisitions and private equity investments.
The scene is actually favourable for relatively smaller deals by specialised players as they can get an attractive valuation for the loss-making company they are willing to acquire. In fact, after the credit crisis in the US, the value of small firms in sectors like pharma, IT, engineering, and metals have dropped significantly and they are now more prone to buyouts.
Taking a cue from Infosys? example to acquire UK-based Axon Group, it would make a good business proposition for Indian IT-ITeS companies to acquire US companies at highly attractive valuations, turn them around and consolidate with their domestic operations.
For a successful M&A, the most important issue now is a quick and an efficient integration process. Cultural integration and meeting the high expectations of the shareholders are the two most important parts of any acquisition. And if the acquisitions are financed through leveraged buyouts or debt, the company has to ensure good cash flows to sustain the acquisition. A detailed road map for a quick integration process can mitigate expenditure of the acquired company at a time when costs of funds are rising globally.
The global slowdown is also an opportunity for Indian companies to look out for business through acquisitions in emerging markets especially in Africa and Latin America. This would give them a larger footprint in these markets at a time when some American companies are pulling out of these regions to fund losses in their domestic markets. The Chinese companies have started taking advantage of this situation and are acquiring smaller companies especially in the engineering and metal space in African countries. This should indeed be the road map for Indian companies in their global march.
saikat.neogi@expressindia.com