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M&A overdrive hits speed-breaker from headlines to boardrooms

M&A overdrive hits speed-breaker from headlines to boardrooms
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First Published: Mon, Aug 27 2007. 01 16 PM IST
Updated: Mon, Aug 27 2007. 01 16 PM IST
New Delhi: Mergers and acquisitions may be the flavour of the season in India this year with reports of potential deals hitting headlines every day, but over 80% of these do not actually fructify.
According to a study by international M&A deals tracking firm Mergermarket, India has emerged as Asia-Pacific’s second-biggest target after China in terms of official or unofficial intentions expressed for takeover deals from across the world this year.
India was the target for 561 potential merger and acquisition deals in the first seven months of 2007, trailing China with 824 potential deals. That’s a daily average of four deals in China and 2.6 deals targeting India between January and July this year.
However, the study says the number of final deals was just 95 for Indian companies (one deal in more than two days), giving a conversion rate of just 17% — the second-lowest in Asia-Pacific after 15% for Taiwan.
Mergermarket said India has emerged as a key region for actual and potential M&A activities, but issues like restrictive FDI policies were hindering the momentum.
“Restriction on foreign direct investment and limited capital account convertibility are limiting deal flow. Important sectors such as banking and retailing remain off-limits to foreign acquirers,” it said.
In India, the three biggest sectors for potential deals were industrials and chemicals (118), telecom, media and technology (88) and financial services (76). In terms of announced deals during the period, 21 were recorded in industrials and chemicals, 15 in telecom, media and technology and 12 in financial services sector.
The study said it was clear from the current activity in India that global players were “attempting to get around FDI restrictions by buying minority stakes in local firms or by setting up joint ventures with local partners — precursors to fully fledged M&A deals which could happen as and when the local regulatory environment relaxes”.
Like India, Mergermarket noted, restrictive barriers to M&A were hindering deal completion in China as well, even though the deal activity was surging with increased interest from international players.
“Domestic regulations on foreign ownership are particularly restrictive to deal activity, while the new frame law stating that the Ministry of Commerce must review all cross-border M&A deals will slow down the approval process. In addition, huge appreciation in Chinese asset valuations, has allowed sellers to change the terms or back out of deals which were agreed to when valuations were much lower,” it said.
China saw a conversion rate of 33% with 273 final deals, while Japan recorded the best conversion rate of 71% with 311 potential deals and 220 announced deals.
The number of announced deals was highest in China, followed by Japan and Australia (211 with 55% conversion rate).
A comparison of deal activities across Asia shows that more established markets such as Japan, Singapore (69%) and Australia have much higher conversion rates than the emerging markets in the region, mergermarket said.
“More sophisticated and transparent regulatory systems mean fewer barriers and a clearer understanding of the advantages of M&A transactions.
“However, increased interest from international players in emerging markets, along with plans by local parties to expand through M&A transactions will, in the medium term, force local regulatory authorities to improve the deal making environment and to change the mindset of local executives,” it said.
Announced deals considered exclude lapsed or withdrawn bids and included only deals valued over $5 million. It also excluded activities like property transactions and restructurings where the ultimate shareholders’ interests were not changed.
The number of potential deals included all opportunities classified as company for sale between January and July 2007 where dominant geography of the potential target is Asia-Pacific, including companies divesting parts of or all of their operations.
It noted that company for sale stories do not necessarily translate into announced deals for the next three to 12 months.
For entire Asia-Pacific region, the total number of potential deals were 3,088 with a conversion rate of 38% into 1,165 announced deals.
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First Published: Mon, Aug 27 2007. 01 16 PM IST