M&A deal activity is anticipated to be lower than last year, primarily on account of fall in outbound investments and private equity investments, revealed an interactive workshop session on Naseba CFO India Strategies-challenges in merger and acquisition processes.

Executive director, PriceWaterhouse Coopers, Sanjeev Krishnan said, “Private equity investments in 2008 have come down to 13% from 25% in 2007. Market private equity multiple have dipped since January 2008.”

Private equity investments across the globe have been hit, by the non-availability of leverage for buy outs. And over 35% fall in the Indian stock market index has meant that both private equity investors and promoter community have shied away from committing themselves. However, with a positive view experts also believe that a certain amount of domestic consolidation along with inbound deals is also expected going ahead and PE activity is also expected to pick up by the last quarter of 2008, as valuation expectations settle.

According to PriceWaterhouseCoopers mid year – 2008 data, domestic deal activity has remained more or less stagnant in H1 2008 compared to the same period last year. The first six months of 2008 saw value of domestic deals at $9 billion spread over 302 deals. The total value of overall inbound deals in HI 2008 was $13 billion, a fall of over 45% against H1 in 2007.

Speaking about the challenges, Krishnan asserted the need for the CFOs to become a part of the deal at a very early stage, right at the inception. “You need to ask decisive questions and probe the zeal for deal early on,” he added.

Some of the other important factors to note while initiating the deal was the memorandum of understanding document or the term sheet. There are a lot of complications in understanding terms and jargon. “Two out of the five deals do not have a clear definition of EBITDA,” he mentioned. There are also issues regarding debt, he adds. “Technically, debt are funds where we have to pay interest.

But what about a large credit given by the suppliers, they can be very debt like,” he pointed out. These are the small things that can become challenges while completing the deal. He stressed the need to review the revenue recognition process, especially with companies that have a long logistical cycle. “The need to look at unfunded gratuity is also critical,” he pointed out and therefore the role of the CFO becomes very important.

Most deals nowadays are happening through auction process and the challenges in deal making processes include, identifying the right deal, evaluating the deal, executing the deal and harvesting the deal.

Making a note of cross border complexities in M&A, Amrish Shah, executive director, tax and regularity services, PriceWaterhouseCoopers said, “Peculiarities of local market, cultural differences, regulatory issues, anti-trust laws, financial reporting/disclosure requirements are some of the cross border complication one must take into consideration.”