India Inc. has already seen a significant uptrend in M&A activity in the first quarter of the year 2016, in contrast to a 2015 slump to $25.65 billion (as against $26.90 billion in 2014)[i] around the same time. The first quarter of 2016 in totality has already escalated significantly to 63% i.e. $7.8 billion, as compared to $4.8 billion around the same time in 2015.[ii] 245 deals have already been announced in this quarter as against 219 around the same time last year.[iii] Deals worth $5.4 billion were announced in March itself.[iv] This marks an eight-fold leap over the same period a year ago.[v] Prime reason for such a surge could be the India Inc.’s domestic deal values that spurt by 67% in the first quarter, while 33 deals were in the technology sector.[vi] More than 180 start-ups received investments of more than $454 million.[vii] Private Equity and Venture Capital investments also remained attracted towards e-commerce or consumer technology sector, with 28 investments worth $970 million.[viii] Core sectors such as telecom, energy and automotive together contributed 50% of the total M&A deal values. Out of the said sectors, telecom sector contributed substantially around 19% of the total deal value including two major deals, which are:[ix]
Orange SA’s acquiring Bharti Airtel in Burkina Faso and Sierra Leone for $900 Million; and
Bharti Airtel acquiring Videocon Telecommunications Ltd – 1800 MHZ spectrum in six circles for $660 million.
The current quarter has already seen global companies looking towards an India focused investment. Lets take a look at the key benefactors that have majorly contributed towards this M&A surge.
1. Increase in the Outbound Deals
Ever since liberalization, Indian companies have gazed at the global business stage. Two-thirds of the revenue of many big companies in the country including Tata Motors Ltd, Hindalco Industries Ltd and Tata Steel Ltd comes from abroad.[x] With the global arena becoming more approachable and globalization making the world a smaller place, India Inc. has also increased its appetite by making nearly 2000 outbound merger and acquisition deals since liberalization in 1991.[xi] Indian companies have always reflected their keenness towards overseas acquisitions, which reached an all time high in 2005-2007 with deals worth $41 billion.[xii] However, ever since recession, India Inc. has been very cautious with its approach. But with the government increasing the outbound investment cap, fall in the base interest and easing debt financing, which has been accompanied by a solidly performing domestic sector, India Inc. has been heading in the right direction towards intense cross-border expansion.[xiii]
The Indian IT industry, has looked towards outbound acquisitions to accelerate growth inorganically, the Healthcare sector has utilized its rich resources to expand to major healthcare markets as regulatory hurdles and high-entry barriers have further relaxed, automotive industries have also reached their crowning moment as major companies have expanded their operations in the Indian Markets through acquisitions and partnerships, Mining companies have focused on overseas purchases to gain new markets and commodity markets have been able to secure access to raw materials and natural resources at cheaper prices.[xiv]
These factors have made outbound interest a strong contributing factor and prime driver for M&A growth in India, with contributions worth 20% of total deal values and consolidation in the domestic market with deal values growing by 66% already this year.[xv] Companies in the United States still remain the major contributors to Indian Inc. as US organizations/participants were involved in 15 out-bound transactions during the course of the quarter.[xvi] Outbound deals have grown more than four times compared to the previous year, envisaging revived business sentiments.[xvii]
2. Increase in the Inbound Deals
In the year 2015, stake purchases in local companies or Indian owned foreign assets by overseas entities, hit a four-year high with 70 inbound M&A transactions worth $10.19 billion.[xviii] A year down and out of the total deals India Inc. has inked this quarter, inbound transactions still continue to remain the highest contributors with deals valued around $3.5 billion contributing to about 30 % of the total deals.[xix] Relaxation in the Foreign Direct Investment slabs, more reasonable valuation expectations by the Indian Companies, improved sentiment around the business environment, easy global liquidity and slowdown in interest in the competing markets like China have spurred renewed investor interest in India.[xx]
With the government being driven by a positive economic outlook and looking to reclaim its lost investor trust, positive policy reforms are expected in the coming quarters in manufacturing and infrastructure sector that may revive private investment while a supportive monetary policy shall further ease the funding environment.
3. Big Ticket Transactions
India Inc. is already on a big ticket M & A spree as the quarter has already witnessed 19 big ticket deals valued over $100 million contributing to over 68% of the total deal value in this quarter.[xxi] These revived business sentiments can be attributed to four big-ticket deals of the quarter, which include:
Jaiprakash Associates Ltd. selling six of its cement units to UltraTech Cement Ltd. for $2.4 billion;[xxii]
Reliance Infrastructure selling its cement division to Birla Corporation Ltd.;[xxiii]
Tass- Yuryakh oil field bought for $1.3 billion by Indian Oil Corporation, Oil India and a unit of Bharat Petroleum;[xxiv]
Yokohama Rubber Co. Ltd. acquisition of Alliance Tire Group for $1,200 million.[xxv]
IT and Banking sector topped in terms of the volume of transactions. Further, the strong deal activity has also been largely supported by big-ticket divestment deals, reflecting India Inc.’s focus on deleveraging their balance sheets as corporates look to dispose of their non-core assets.[xxvi]
What Lies Ahead?
The year 2016 has already witnessed over 400 deals in total valued around $11.9 billion.[xxvii] If the market conditions and the economy remain as favourable as they are, it is beyond any cavil that the present M&A surge has the potential to reach India’s highest point till date. The high point of 2005-2007 was predicated on a confluence of several positive factors, including strong domestic cash flows, dynamic global demand, availability of cheap finance and a robust currency.[xxviii] Although these forces are unlikely to come together again, yet Indian companies are expected to continue pursuing M&A opportunities, by accessing new markets or upgrading technology.
While High-tech industries, such as IT and pharma, continue to find opportunities in the US and western European markets, low-tech industries looking to widen their distributions are likely to be high on opportunities as well.[xxix] High-tech industries on the other hand shall continue to remain focused on accessing large customer bases and protecting their Intellectual Property. With India giving favourable rulings towards protecting infringement rights throughorders and perhaps being the only country doing that at this instance, these high-tech industries are finding Indian Markets most favourable for satisfying their Intellectual Property protection needs.[xxx]
As India Inc.’s balance sheet strengthens; outbound M&A will be an important imperative for growth. However, in order to succeed, Indian companies need to make M&A an extension of their growth strategy and start building M&A capabilities ahead of time. Nevertheless, M&A surge is expected to maintain its momentum in the near future, as the activity is expected to remain strong in the coming months.
Disclaimer:The views and opinions expressed in this article are based on extensive and thorough research. In no way does the author or the law firm claim ownership of the ideas and concepts presented in this paper. Information so provided is to be strictly considered for general reference of the subject matter, which has been adequately referenced. Specialist advice should be sought about any specific circumstances directly from the law firm.
[i] PTI, ‘India’s merger and acquisition deal tally crosses $25billion this year: Grant Thornton’ (The Economic Times, 15 October 2015) < http://economictimes.indiatimes.com/news/company/corporate-trends/indias-merger-and-acquisition-deal-tally-crosses-25-billion-this-year-grant-thornton/articleshow/49379880.cms > accessed on 01st January, 2016
[ii] PTI, ‘Value of M&As involving Indian Companies jumps 63% to $7.8 billion in Q1’ <http://economictimes.indiatimes.com/news/economy/finance/value-of-mas-involving-indian-companies-jumps-63-to-7-8-billion-in-q1/articleshow/52111671.cms> accessed 04th May, 2016
[iv] PTI, ‘India Inc. on M&A spree: March deal tally at $5.4 billion’ <http://articles.economictimes.indiatimes.com/2016-04-19/news/72453445_1_ma-spree-grant-thornton-india-llp-deal-momentum> accessed 05th May, 2016
[vi] SiliconIndia, ‘India Inc’s First Quarter Registers Eightfold Rise in M&A’, April 22nd, 2016 <http://www.siliconindia.com/news/business/India-Incs-First-Quarter-Registers-Eightfold-Rise-in-MA-nid-194696-cid-3.html> accessed 05th May, 2016
[vii] P. Sarkar, ‘2016 see over 400 deals worth $11.9 billion in first quarter: Grant Thornton’, April 13th, 2016 <http://www.livemint.com/Home-Page/hOgDPWIs4iKyzdKmvlHt3I/2016-see-over-400-deals-worth-119-billion-in-first-quarter.html> accessed 05th May, 2016
[x] S Rajan & S Unnikrishnan ‘India looking outwards’ <http://www.livemint.com/Companies/OVmUHqd53fhtmcfe7mzk0M/India-looking-outwards.html> accessed 05th May, 2016
[xv] Id, iv
[xvi] Id, ii
[xvii] Id, vii
[xviii] S.S. Dhanjal, ‘Inbound M&A deals on course to hit a four-year high this year’, August 19th, 2015 <http://www.livemint.com/Companies/17lMeok1r7euPJj1asx4DP/Inbound-MA-deals-on-course-to-hit-a-fouryear-high-this-yea.html> accessed 04th May, 2016
[xix] PTI, ‘M&A deal value jumps over 8-fold in March’, April 19th, 2016 <http://www.thehindubusinessline.com/markets/ma-deals-value-jumps-over-8fold-in-march/article8493900.ece> accessed 04th May, 2016
[xx] Id, xviii
[xxi] Id, iv
[xxiv] Id, ii
[xxvi] The Hindu, ‘Value of M&As involving Indian companies jumps 63% in Q1’, May 05th, 2016 <http://www.thehindu.com/news/cities/mumbai/business/value-of-mas-involving-indian-companies-jumps-63-in-q1/article8559045.ece> accessed 05th May, 2016
[xxvii] Id, viii
[xxviii] Id, X
[xxix] Id, x
[xxx] ‘Telefonaktiebolaget LM Ericsson v. Xiaomi Technology & Ors.’ in CS(OS) 3775/2014 order dated 08.12.2014 available at < http://spicyip.com/wp-content/uploads/2014/12/Order-dt.-08.12.14-Telefonaktiebolaget.pdf> accessed on 03rd May, 2016