Indian companies that were cautious in their Merger and Acquisition (M&A) strategy overseas last year are keenly looking at targets in 2010. M& A experts predict that there could be a seven to eight-fold growth in outbound M&A with confidence returning to business.
According to data from Grant Thornton, the accounting and consulting firm, there were 196 outbound M&A deals in 2008 with a total value of $13.19 billion which dropped to 82 deals at a value of $1.38 billion in 2009 due to the global economic slowdown.
"Valuations are marginally better than last year. Most importantly, confidence has returned to companies in India. While growth is still not back in Europe and US, downtrend has been arrested. We could see outbound M&A deals touch close to $10 billion in 2010," said Harish H V, partner, national management, Grant Thornton. Areas that could see potential M&A deals are auto components, telecom, general manufacturing, hospitality and media.
Analysts say that availability of finance is one of the primary reasons why companies have started scouting the market for buyouts in other countries. Grant Thornton said that there were 206 private equity deals in 2009 with a total announced value of $3.44 billion, a fall of 68 per cent from 2008 when as many as 312 deals worth $10.59 billion were announced. The global slowdown, corporate scandals and high valuation expectations by promoter companies were said to be the major contributors for the decline. However, the start of 2010 is already showing a growth trend through PE as well as qualified institutional placement (QIP).
The total value of private equity transactions and QIP deals amounted to $1.24 billion in January 2010, against $309 million in the year ago period, registering an over four-fold jump.
Upturn was also witnessed in terms of the number of deals recorded in this month. In January this year, 29 PE and QIP transactions were posted, against 16 deals registered during the same period in 2009. Significant deals that have been announced so far in 2010 are Bharti Airtel’s deal to acquire Zain Telecom’s Africa assets and Shree Renuka Sugars’ agreement with Grupo Equipav to acquire a 50.79 per cent stake in Equipav SA, one of the largest sugar and ethanol producers in Brazil.
Peter King, partner, Weil Gotshal & Manges, said that there is optimism on M&A deals for 2010 with distressed assets coming into the market. Giving a global perspective on financing M&A in difficult markets, King said that around 2006, certain funds were available from many banks whereas at the moment there is limited bank finance and only certain banks active.
"However, there is still financing available for the right borrowers and the right deals, for example Kraft borrowed $5 billion to finance the Cadbury takeover," he said.
While valuations of international targets are attractive at the moment, analysts say that companies should take decisions based only on the long-term strategy. "M&A should be a supplement and not a substitute for organic growth," said Lakshminarayana K R, chief strategy officer, information technology businesses, Wipro Technologies.
He said that despite attractive valuations, the company would not get into an M&A deal just because of the low cost. "We are open to acquisitions in geographies like Europe when the right opportunity comes along. Cash conservation is the key during the downturn, hence an investment needs to be absolutely strategic," he said.