Mumbai: Mergers, acquisitions and spin-offs involving Indian companies are becoming more difficult and a study reveals that in the first 10 months of the year, the value of the deals that fell through is at least 20% more than the corresponding number for 2007.
It is difficult to measure the value of deals that fell through because no value is assigned to some of these, such as the one between Reliance Communications Ltd, or RCom, and South Africa’s MTN.
Also see Uncertain times
And, while the number of deals that fell through in the first 10 months of this year is less than that in 2007, experts and analysts say the overwhelming trend is of slowing M&A (merger and acquisition) activity in the background of drying credit lines, plunging market capitalizations and global economic uncertainty.
Sanjiv Kaul, managing director of private equity firm ChrysCapital Investment Advisors India, said he is “not surprised” with the numbers with the entire global scenario in a flux, “in a process of change in the last six months”. “Fundamentals are not so steady anymore. There are too many moving parts.”
According to the study by Thomson Reuters, deals worth $1.51 billion (Rs7,308 crore) fell through between 1 January and 10 October this year, up from $1.26 billion in the same period in 2007. Deals worth $1.39 billion fell through in all of 2007. The deals considered include those in which an Indian firm was either the acquirer or the target and those involving a spin-off by an Indian firm.
The study also shows that the number of deals that fell through declined from 21 last year to 15 this year. Joanne Hon, head of research for Asia in Thomson Reuters, termed this “positive”.
“We have seen a strong trend of withdrawal of (M&A) deals and we will continue to see this trend on global meltdown. We will see India being a part of that scenario as well,” said Hon.
She added that “the number of deals that came apart have reduced..so, the balance is there”, but said that this probably meant that “bigger deals were falling off”.
A senior management consultant, who did not want to be named because some of the companies involved in deals that broke off were his firm’s clients, said M&A activity had peaked in the past few years when there was enough money in the system.
With most countries in the world in the grip of a credit crunch, it is only natural that this activity reduces now, he added.
“Valuations issues were also there in these cases as many of these targets had valued themselves when the Sensex was at 20,000 and higher. In other cases, it could be due to funding (difficulties).”
Sensex is the 30-stock benchmark index of the Bombay Stock Exchange and it has lost around 46.72% between 1 January and 15 October.
Hon said the uncertain global economic environment had brought the shopping spree by companies to a halt. “Corporates will start to focus on business sustainability through organic growth” she said.
The environment also makes it very difficult for the companies involved in a transaction to arrive at a “bidding price”, Hon added, because the volatility in stock and credit markets had skewed traditional parameters used to arrive at this figure.
Apart from the RCom-MTN deal, other transactions that were abandoned include Vedanta Resources Plc.’s restructuring, Essar Steel Holdings Ltd’s bid for Esmark Inc. and Ranbaxy Laboratories Ltd’s plan to spin off its drug research arm.
An 18 July statement by RCom on its MTN deal said that “the parties are presently unable to conclude a transaction” owing to “certain legal and regulatory issues”.
Indian markets were plummeting and RCom’s shares were down 24% in the May-July period when the negotiations were on.
An executive close to the development, who did not want to be named, said: “It was a share swap and did not require debt financing. Our reasons were different.” This person added that “everybody was hard-pressed for cash”.
Vedanta Resources, in a release dated 24 September, stated that it was pulling off its restructuring plan “in view of the recent changes in global financial markets and investor feedback”.
A Ranbaxy spokesman, when asked about the reasons behind shelving the demerger, said that the purpose of doing so—seeking alliances and partners among new drug research companies—was taken care of when the drug maker was acquired by Japan’s Daiichi Sankyo Co. Ltd.
“The objective of the earlier proposed NDDR (new drug discovery research) demerger will be achieved by leveraging respective research capacities,” the spokesperson added.
According to the study, India fares better than some developed countries in terms of M&As. The size of “completed” M&A deals for India had declined by 25%, according to an 9 October Thomson Reuters report—exactly in line with the global average and significantly better than a 28% decline for the US, 57% for France and 32% for the UK.
“India’s data is not shocking because it has been able to absorb a lot of it in in-bound deals. It is not at (the) top of the list in (deal) withdrawals,” said Hon.
Kaul said that while companies “may wait for these moving parts to stabilize, for a degree of predictability to kick in”, there would still be “pockets of growth in every sector in India even now.”