Mumbai: After a spate of big M&A 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’s $12.9 billion (Rs51,600 crore) acquisition of Corus and Hinalco’s $6 billion (Rs24,000 crore) purchase of Canada’s Novelis.
“The whole environment right now is that of “wait and watch”. The credit problem and its impact on the ability to finance these deals is making some corporates take a cautious stance,” said Falguni Nayar, managing director of Kotak Investment Bank.
Tata Motors and Mahindra & Mahindra are reported to be eyeing competing bids worth an estimated $1.5 billion for Ford’s Jaguar and Land Rover brands.
The mood is generally cautious
Following an aggressive acquisition spree last year, Ranbaxy Laboratories Ltd has 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’ $300 million buy of Yipes Holdings Inc and Wipro’s purchase of Infocrossing Inc at an enterprise value of $600 million.
While short-term drying up of credit should not significantly hurt 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,” said Raj Balakrishnan for DSP Merrill Lynch.
He said companies may have to consider options such as funding deals with more equity, or putting more leverage on their own balance sheet.
“On balance, the benefit from more reasonable valuations and reduced competition for deals will help the better-funded Indian corporates,” Balakrishnan said.
In 2006 Indian companies aggressively acquired foreign firms
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 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 plans to raise Rs35 billion to fund acquisitions in the international generics markets, while Indian Hotels plan to raise $475 million to fund growth, including acquisitions.
Takeover targets, costly affair
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.”