Mumbai: After a spate of big M&A (mergers and acquisitions) deals, corporate India’s drive for foreign acquisitions has ebbed amid concerns about a global credit squeeze, though firms with strong balance sheets may look for bargains as valuations come down.
Indian firms are still negotiating deals and raising funds for acquisitions, but the size of deals has fallen after Tata Steel Ltd’s $12.9 billion (Rs57,147 crore in January) acquisition of Corus Plc. and Hindalco Ltd’s $6 billion purchase of Canada’s Novelis Inc.
Big deal: Executives of Tata Steel Ltd and Corus Group Plc. after the Indian company bought the Anglo-Dutch steel maker for $12.9 billion. Deals of such large size would now be hard to execute, experts say.
“The whole environment right now is wait and see. The credit problem and its impact on the ability to finance these deals is making some corporates take a wait-and-watch stance,” said Falguni Nayar, managing director of Kotak Investment Bank.
Tata Motors Ltd and Mahindra & Mahindra Ltd are reported to be readying competing bids worth an estimated $1.5 billion for Ford Motor Co.’s Jaguar and Land Rover brands.
But most Indian firms are opting for caution.
Following an aggressive acquisition spree last year, Ranbaxy Laboratories Ltd backed out of a race for the generics unit of Germany’s Merck KGaA, citing high valuations.
Indian firms have announced deals worth $16.08 billion this year, up from $6.2 billion in the same period of 2006, data from Dealogic shows, but the deal flow has eased in recent months.
Outbound Indian deals amounted to $7.3 billion in February, and ranged between $1.6 billion and $2.2 billion in the following three months before sinking to $670 million in June and $570 million in July, according to Dealogic data.
Recent deals include Reliance Communications Ltd’s $300 million buy of Yipes Holdings Inc. and Wipro Technologies Ltd’s purchase of Infocrossing Inc. at an enterprise value of $600 million.
While short-term drying up of credit should not significantly hurt the M&A activity, worries about the long term remain.
“A longer-term squeeze will impact the potential to carry out transformational deals based on non-recourse leverage,” Raj Balakrishnan of DSP Merrill Lynch said.
He said companies may have to consider options such as funding deals with more equity, or putting more leverage on their own balance sheets.
Indian companies, thriving in a rapidly expanding economy, made global headlines last year when they began aggressively acquiring foreign firms as they sought to deploy strong profits and valuations to gain access to new technologies and markets.
In 2006, outbound M&A from India rose to $21.6 billion, a fivefold jump from a year earlier, and bankers say the rationale for foreign acquisitions remains strong.
“The underlying synergies are not really related only to the cost of borrowing,” said ICICI Bank Ltd’s deputy managing director Chanda Kochhar. “There are forward linkages and backward linkages: Some power plant acquires a coal mine somewhere; some tea company acquires a distribution network. So that logic is still very strong.”
She said ICICI was still providing loans to worthy borrowers and advising clients to complete ongoing deals as the underlying credit risk had not changed.
Ambitious Indian firms, meanwhile, continue to arm themselves with funds for acquisitions.
India’s most valuable drug maker, Sun Pharmaceutical Industries Ltd plans to raise Rs3,500 crore to fund acquisitions in the international generics markets, while Indian Hotels Ltd plans to raise $475 million to fund growth, including acquisitions.
Jayesh Shroff, a fund manager at SBI Mutual Fund, said the rush for acquisitions had made takeover targets costly.
“Valuations of target companies are quite high. Most of these were leveraged buyouts and with this kind of credit squeeze, bankers would be averse to that,” he said.
However, some bankers say that in India, the impact of the credit squeeze mainly affects sentiment.
“Logically, there is no correlation between defaults in the US subprime mortgage market and the credit quality of Indian corporates and their acquisitions abroad,” said ICICI Bank’s global head of investment banking, Kalpesh Kikani.
“However, banks which operate in those markets may—purely due to sentiment—become more cautious and risk averse.”