When one thinks of mergers and acquisitions (M&As) in India, it is cross-border deals that first come to mind: Tata Steel’s acquisition of Corus or Vodafone’s stake buy in Hutch Essar. This slowdown gives Indian businesses the opportunity to refocus their attention locally.
Out of the 135 deals that took place in the first quarter of 2008, 79 were cross-border. Data released last week by deal tracker Venture Intelligence show that the first quarter of 2009 has seen only 15 cross-border M&As, out of a total of 54. It’s worthwhile, then, to ask why foreign deals have taken such a beating.
Illustration: Jayachandran / Mint
Indian businesses, in the midst of a bull run in the past few years, were psychologically and financially buoyed enough to look abroad. The slowdown has dampened these ambitions.
But these ambitions always seemed a step ahead, given the domestic market still hasn’t been fully exploited. That’s hardly a surprise, since the local market for M&As has never been very attractive. Domestic transactions for the first three months of 2008 numbered 56, outpaced by 61 outbound deals.
Family promoters are rarely willing to lose control; the lack of activist shareholders only reinforces their power. Domestic financing for M&As is also thin, with the corporate debt market barely existent. Indian companies looking to make acquisitions instead turned to overseas credit markets for cash.
That brings us to a larger global issue: The overseas market for credit may have been inflated in the past. Led by the US Federal Reserve, credit in developed financial markets came cheap, fuelling the global aspirations of firms such as Tata Motors and Hindalco.
The financial crisis, which began with a credit crunch in August 2007, has turned off this easy-money spigot. Now, both foreign companies looking to enter India and Indian ones eyeing foreign deals have had to confront reality.
This doesn’t mean the environment for M&As is doomed. The downturn should invite investors looking for cheap assets: As soon as companies are more confident about valuations, M&As are sure to start growing in number. But companies should keep in mind that a global credit bubble had a large role to play in the euphoria last time. Instead, they should focus on local consolidation, with the aim of bettering the domestic market for M&As.
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