Bangalore: After lying low for nearly two years, Indian companies are once again hunting for acquisitions, a new study shows.

Audit firm Ernst and Young’s (E&Y) April study measuring confidence in the global economy shows that in India, 54% of the companies surveyed have said they are likely or highly likely to acquire other companies in the next 12 months. That’s nearly double the number of firms that were considering acquisitions six months ago. E&Y surveyed 58 mid- to top-tier companies in India for its study.

Confidence is growing in the Indian mergers and acquisitions (M&As) space, with the focus shifting away from divestments, says E&Y’s latest Capital Confidence Barometer.

“With greater liquidity, we are seeing companies more willing to make acquisitions that they had previously deferred,” Ranjan Biswas, partner and national director (transaction advisory services), E&Y India, said in an email. “With the current environment, we are observing that there are more potential buyers than willing sellers.”

M&As by Indian companies fell sharply during the downturn and are still to recover. The E&Y study points to a return of confidence among local firms as the business environment improves.

Biswas says buyers are becoming more focused on future potential rather than past performance. “If a company can actually demonstrate real revenue and market share growth, then it will fetch a higher valuation relative to its peers,” he said. According to the E&Y study, Indian companies, in addition to M&As, are most likely to focus on joint ventures, alliances and restructuring of core and acquired assets in 2011.

C.G. Srividya, partner, specialist advisory services, Grant Thornton India, says outbound deals, or acquisitions of foreign firms by Indian companies, would increase three to four times over the next six to 12 months, contributing nearly 50% to the deal flow. “A lot of outbound deals are in discussion. Even if a fraction of them actually happen, it would significantly add to the overall deal flow,” said Srividya. She also sees Indian acquirers depending less on bank loans and more on equity for funding their buys, Vendor financing could also come up as a preferred source of funds.

But while confidence is up, the past points to a host of post-acquisition traumas for Indian firms scouting abroad.

E&Y says issues like financing of deals, lawsuits from previous owners, commodity prices or market changes and delays in government approvals can derail the acquisition process. And then, there are the so-called soft integration issues that can make an acquisition expensive.

For instance, Bangalore-based Sasken Communication Technologies Ltd, which is integrating Finland’s Botnia Hightech Oy after it bought the firm in 2006, has had to face workers’ councils in that country for seemingly routine issues such as temporary transfer of employees, and daily allowance and accommodation for travelling staff. “Whenever the plan for return on capital goes from five to six years to eight to nine years, it becomes an expensive acquisition,” said Sasken’s executive chairman Rajiv C. Mody. “Also...investment cost goes up by 40-50%.”

For textile firm Alok Industries Ltd, which acquired Czech firm Mileta AS in 2007, the main problem was language. It eventually had to hire people familiar with both the local language and English. Alok also had to change the accounting process to clearly understand financials and the management information system, said chief financial officer Sunil Khandelwal.

Still, Indian firms say they cannot afford to avoid overseas buys. Sasken’s Mody, for instance, says Europe contributes 30-35% to revenue and the firm needed a foothold there. “Nokia is a key customer and it would not have been with us if we had not acquired the Finnish firm.”

deepti.c@livemint.com