Mumbai: Merger and acquisition (M&A) deals fell to a three-year low in 2012, down nearly 61% from 2011 and 138.5% from 2010, as slowing economic growth, promoters hoarding cash and the reluctance of private investors to back such undertakings took a toll on these transactions.
The year saw 639 M&A deals worth $26.4 billion, compared with 817 deals worth $42.5 billion in 2011 and 800 transactions worth $62 billion in 2010, according to estimates by VCCEdge, an investment tracker.
“2012 was a year of huge volatility for M&A transaction,” said Sourav Mallik, senior executive director, M&A, Kotak Investment Banking, adding that a few large transactions towards the year’s end propelled deal value.
November alone saw transactions worth nearly $10 billion, as deal activity recovered. The multi-billion worth of deals in the month included ONGC Videsh Ltd’s agreeing to buy US energy firm ConocoPhillips Co.’s 8.4% stake in Kazakhstan’s Kashagan oil field for about $5 billion, which is also the largest M&A transaction in the country this year.
The other two big November deals were Diageo Plc.’s decision to buy a 53.4% stake in United Spirits Ltd for $2.1 billion, and Hinduja Group firm Gulf Oil Corp.’s acquisition of US-based chemical maker Houghton International Inc. for $1.05 billion.
“The deal volume in 2012 was not phenomenal but top 10 deals accounted for half of the transactions value. There won’t be many multi-billion dollar deals; the flow of deals in the $100 million range, however, has not suffered much,” said TV Raghunath, managing director and chief executive officer, Kotak Investment Banking.
The top three sectors that saw the highest M&A activity by deal value were energy, consumption and healthcare, totalling 230 deals worth $14.95 billion.
Experts say domestic consolidation will continue. Debt is hurting many companies and promoters will look at consolidation, said Avinash Gupta, senior director and leader, financial advisory, at Deloitte in India.
“There will be few bulge-bracket deals. Banks and insurance, which fall under the broader domestic consumption thesis, will see a few large deals. Newly foreign direct investment (FDI) opened segments like aviation, media and retail will see activity,” said Gupta.
Large India companies will drive outbound deals in 2013. Indian firms, particularly market leaders that have cash, do not want to focus only on India, said Mallik. “Outbound deals are bound to increase form here. These deals will initially be led by large companies and the momentum will slowly move to the mid-caps,” he said, cautioning that these transactions are more difficult to close.
When it comes to inbound interest, firm based in Japan and the US continued to pay attention to Indian firms and will drive a major portion of deals.
Japan’s stagnant economy is pushing companies to aggressively pursue M&A opportunities overseas, said Vinod Wadhwani, director, Ambit Corporate Finance. “There is a high level of client interest from Japan for M&A in India. US economy is also giving some positive signals, which is encouraging for M&A in India,” he said.
According to Wadhwani, 2013 will see better M&A deal flow than 2012. Also, if one considers the pipeline, buoyancy seems to be coming back, though it takes nine to 15 months to close a deal.
Media, consumer products, infrastructure services and engineering will see a surge in activity, he said.
“As the market improves, PE (private equity) players are waiting to exit portfolio companies where they have been invested for 4-5 years. This will also contribute to the M&A and equity capital markets pipeline,” Wadhwani said.
While the average ticket size of transaction this year was $101 million, experts expect it to be in the $100 million to $200 million range next year as well.