India has arrived and is being accepted by all.? That was Sunil Bharti Mittal in 2008 at London soon after the Tata-Jaguar deal had been announced. He was delighted with the deal and proclaimed, ?Jaguar and Land Rover are iconic brands known to the entire world. For Tata to pick them up is fantastic.?

By the turn of the year, Mittal grabbed headlines with South Africa?s MTN Group?s second-largest shareholder, the Mikati family, supporting a proposed $23 billion cash and share swap deal with Mittal?s Bharti Airtel. A merger that in terms of market capitalisation would create the fourth largest telecom major in the world. And for Bharti, the merger will mean a rapidly growing market in 21 new countries in Africa and Middle East.

LEADING THE WAY

With increasing globalisation, Indian companies will continue to invest in M&As, that?s the most likely prediction. As Lauro Vives, Chief Executive Officer, XMG Global ICT Research and Advisory, Canada shares, ?Market participants, particularly Indian ?blue-eyed? companies such as Tata will pursue national or continental, if not global, strategies through M&As to gain business credibility, customers and presence outside of India.?

Vives explains that this upward swing will be particularly true of IT-intensive industries that are going through a restructuring process, and in sectors such as energy, pharmaceuticals and finance. ?Although M&A is not the answer for every one across industries, it is a viable option for companies with war chests and deep pockets to fill gaps not only in their technology and business process portfolios, but also in their customer lists. Sometimes this reflects a general desire to acquire market share, or it can be about gaining vertical-market expertise. Companies will make clear and deliberate choices of their acquisition targets. Many of the Tier-1 companies such as IBM and Tier-2 such as Teleperformance, increasingly recognise M&A is a critical strategic element of their company?s success.?

Cross-border M&A deals emanating from the emerging markets are getting bigger and better by the deal. A cursory look may just spell that. But a closer peek may well change the scene. As Ranjan Biswas, National Director, Transaction Advisory Services, Ernst & Young, points out, ?In 2008, India accounted for just 2% of the global M&A deal value. Compare this to the US and Europe, India still remains a small M&A market and our heightened profile is due to a few large cross border deals such as Tata-Corus, Tata-JLR, Hutch-Vodafone etc. Not many private Indian companies have the size to undertake large deals and our share in the global M&A market will continue to remain at the present levels till our corporate houses can occupy more slots in the global 500 rankings.?

Cash is king

In a cash crunch scenario, globally several large M&A deals such as BHP?s intended purchase of Rio Tinto; Apollo?s acquisition of Huntsman and the purchase of BCE a leading Canadian telecom operator by a consortium of private equity buyers have already fallen through on account of the meltdown. Biswas explains that the key reasons for this include buyers not being able to finance the transaction or trying to back-out of transactions struck during better times at valuation levels, which they no longer view as viable. ?Clearly, transactions that require significant financing ? either bank financing or equity or debt financing provided by the capital market ? are at present difficult to complete. Further, those transactions that do complete take longer to reach close as buyers are taking longer to conduct due diligence and require more time for their internal approval processes or for obtaining financing.?

A sentiment also echoed by Gautam Ahuja, Professor of Strategy, Ross School of Business, University of Michigan, ?Deals that relied on heavy leverage/debt may fall through because banks may not have the resources or willingness to fund them. Similarly, deals made at high valuations may start falling through as firms utilise the ?materially adverse? business clause to walk away from prices that make little sense in the current market place.?

Given the changing equation, cash payments for deal is emerging as the most preferred option. As Dhanraj Bhagat, Partner, Specialist Advisory Services, Grant Thornton avers, ?Cash payments is even more important now given that stocks have taken a beating and issuing stocks at low prices could have many implications including promoter dilution. Those who raised cash for M&A activity before the meltdown should be in a good position to pick up assets at current low valuations.?

The credit crunch seems to be wiping off the sheen of developing markets assets, As Ian Gomes, Chairman KPMG?s High Growth Markets practice, affirms, ?We are seeing a marked decline in terms of deals into the emerging, high-growth markets. However, this is more indicative of the purchasers struggling for credit than it is of the emerging markets losing their appeal. The trend of increasing capital flows from West to East is however not cancelled, it is merely postponed. Trade buyers around the world are constrained by the lack of available credit. However, even those that do currently have access to funding do not necessarily intend going on an uncontested spending spree.?

Gomes says full-blown cross-border deal activity may only restart once liquidity starts to flow again. With mid-sized companies, making mid-sized deals are most likely to be at the forefront of the revival.

The Paradigm Shift

Deal dynamics suggest that Asia has done well in the M&A market and in the first quater of 2009 (1Q09) accounting for almost 39% of deals. This is the first time that Asia?s deal count has been higher than America and EMEA (Europe, Middle East and Africa). Within Asia, Australia has been dominant with deal value in 1Q09 increasing by 40% over the same period last year. Also showing considerable growth in the M&A market is China.

?The ability of Chinese firms to access financing courtesy government ownership allows them to access the huge reserves,? explains Biswas. ?The speed of decision making by the state-owned firms and a focussed acquisition strategy centred around acquiring stakes in raw materials ensures that economic growth does not suffer due to their unavailability or an increase in the prices of key raw materials. Technology firms have been key to successful transaction closure by Chinese firms as well.? Also catching up fast are the emerging markets of Central and Eastern Europe, Brazil and Russia.

Another emerging trend in the M&A matrix indicates that many companies are now switching focus back to their domestic market. In China, companies are even being actively urged to do so by their government, says Gomes. So probably future deal activity may be restricted to mainly domestic deals.

However analysts at XMG believe that the current economic downturn will create a new normalcy and change the fundamental structure of the IT industry ? as the scale and scope of M&A effort will change profoundly and clients will look beyond cost savings to include continuous process improvements and transformations.

Way to go

As M&As will remain one of the important tools for business restructuring in the current economic context and continue driving business strategy, it will require certain sops from the government to give it a much needed spurt. As Ahuja shares, ?The government can ensure that accounting is accurate and that numbers being provided are accurate and reliable. Further, it could support the M&A market by making the tax treatment of such mergers completely transparent for all parties. They also need to ensure that consolidation in industries does not reduce competition and hurt the consumers.? A need corroborated by Biswas, ?The sops ,which could include measures that improve overall liquidity and lower interest costs, such as further reduction in the cash reserve ratio; further easing of the External Commercial Borrowing norms; and a further reduction in the repo rate. Also other structural measures that could boost M&A volumes include easing of FDI caps in sectors such as financial services and retail and simplification of the tax and regulatory regime.?

Though firms which are in a position of strength can get good deals, as many company valuations are low compared to the price they would have sold at a year ago, Professor Timothy Galpink, author of The Complete Guide to Mergers and Acquisitions: Process Tools to Support M&A Integration at Every Level cautions that companies need to follow closely certain key aspects and not be carried away by devalued proposition.

These include, ?Doing in-depth due diligence regarding not only the traditional financial, operational, technological fit and considerations, but also the cultural fit between the firms. Also making integration decisions quickly and communicating those decisions clearly to all stakeholders, so that the grapevine doesn?t take over and confuse the integration process.?

He adds that currently acquisitions are more attractive. ?In today?s economic climate, there are stronger and weaker companies, and the stronger companies can get good prices for the weaker ones that they acquire.? Well that for sure seems to be the strategy wide and clear. With Intel, world?s biggest chipmaker just announcing that it sees acquisition opportunities as prices of potential targets have dropped amid the economic slowdown and the company has a ?reasonable amount of cash.?

Global M&A deals count hits 10,000 mark

Globally 10,000 mergers and acquisition took place on April 30, with the Asia-Pacific region accounting for the highest number of deals. This is the first time on record that YTD deal count in the Asia-Pacific region has been higher than America and Europe, the Middle East and Africa

$685.3 billion The global M&A volume

37% Percentage of deals Asia-Pacific region accounts for

Finance Sector that attracted the maximum number of M&As

$6.8 billion Worth of deals announced

Real estate Sector saw second highest M&As

$1.7 billion Worth of deals announced

Healthcare Sector that attracted third highest M&As

$1.3 billion Worth of deals announced

US & Japan The top-two targeted nations

72% Percentage volume of the M&As the two nations account for in 2009

48% Percentage volume of M&As the two nations accounted for in 2008

Source: Dealogic/PTI