Mergers and acquisitions (M&As) in India have so far merely scratched the surface. That’s the conclusion that follows from a Mint study of consolidation in Indian industry. Only two industries, cement and metals, out of the 20 sectors analysed, showed consolidation as a result of M&As. While Indian companies have been spreading their wings and have made several high-profile acquisitions abroad, domestic M&A activity has been relatively tepid.
One reason for this is that domestic M&As usually involve picking up stakes in small firms, particularly in the infotech sector. For instance, Grant Thornton, an accounting firm known for its research in M&A activities, says there were 42 cross-border deals in May, valued at $4.11 billion (Rs16,851 crore), while 32 domestic M&As during the month had a value of a mere $0.26 billion.
Consolidation vs Fragmentation Part I (Graphic)
Consolidation vs Fragmentation Part II (Graphic)
Similarly, in March and April, out of the total M&As worth $6.12 billion, domestic M&As were valued at $730 million. Among the cross-border deals, the value of inbound deals is much lower than that of outbound deals. For instance in March and April, the value of inbound M&As was $1.98 billion, compared with $3.41 billion for outbound deals.
According to Bloomberg data, thus far in 2007, outbound M&As from India totalled $13.6 billion while domestic M&As added up to $3.3 billion. During the same period, foreign firms spent $115.42 million acquiring Indian firms.
There’s little doubt that Indian companies need to consolidate to achieve economies of scale and pricing power. But there are several reasons why that is difficult to achieve. One of them is the fact that most Indian corporations are closely held, with the promoter group having a large stake.
In sectors such as banking and oil and gas, the government is also a large player. Although there has been some M&As among public sector oil and gas companies, mergers among public sector banks have not occurred despite the finance ministry pushing for it, because of opposition from the unions.
A third reason for domestic M&A activity not taking off is because banks in India are not allowed to lend for acquisitions. “Under the Reserve Bank of India (RBI) norms, banks cannot finance an M&A deal if the acquirer is buying the equity of a firm. However, we can finance a deal that involves asset buying. In most of the cases, companies are buying equities and not assets,” says a senior banker who does not wish to be identified. RBI norms, however, allow banks to finance overseas M&A deals. On the domestic turf, banks are allowed to finance the government’s divestment programmes and acquistions in the infrastructure space. In the case of all other deals they can only finance the purchase of assets and not equities.
There are signs, however, that domestic M&A activity may pick up. The Jet-Sahara and UB-Air Deccan deals and M&M’s acquisition of Punjab Tractors prove the need for consolidation.