Between January and July, 70 inbound M&A transactions worth almost $10.19 billion were sewn up, compared with 165 deals valued at $11.22 billion closed in all of 2014, according to data from Grant Thornton Llp’s Dealtracker report.
Inbound transactions made up half the overall M&A deal value of $20.34 billion in the January-July period. Overall, 322 deals worth $20.34 billion have been closed this year.
This year’s transaction value does not include large inbound deals like Russia’s OAO Rosneft’s agreement to buy a 49% stake in Essar Oil Ltd because financial details of the purchase have not been disclosed by the companies. BNP Paribas SA’s decision to buy domestic brokerage Sharekhan Ltd has also not been included in the tally for the same reason.
“There was a lot of pent-up demand in India for investments, which slowed down over the last two to three years because of uncertainty around government policies and actions. We are seeing a gradual improvement on that front, which is boosting the sentiment towards investing in the country," said Harish H.V., partner at Grant Thornton India.
Several large international companies, which are sitting on a huge pile of cash, are looking at deploying capital, said Harish.
To be sure, the value of inbound M&A transactions this year is dwarfed by the $29 billion in deals struck in 2011, which was a 10-year high.
More reasonable valuation expectations and the need for global investors to diversify away from markets like China, where growth is slowing, have also spurred this year’s deal activity apart from an expected rebound in economic growth that slowed in recent years.
The biggest inbound acquisition so far this year has been Centerbridge Partners Lp’s purchase of Suzlon Ltd’s German subsidiary Senvion SE for $1.2 billion. This was followed by Reliance Industries Ltd’s sale of 50% stake in Eagle Ford Shale in the US for almost $1.07 billion. Harman International Industries’ acquisition of software, mobility and analytics firm Symphony Teleca Corp. for $780 million was the third biggest inbound deal in the year to date.
Mylan Inc.’s acquisition of Famy Care Ltd’s women health care business for $750 million and Alibaba Group’s minority stake acquisition in One97 Communications Ltd (which owns Paytm) for $575 million have been other significant deals.
Globally, M&A transactions are close to touching the record high of $3 trillion seen in 2007. According to a 14 August report by Reuters, global M&A activity has already reached $2.9 trillion this year.
Improved sentiment around the business environment in India, a slowdown in competing markets like China and easy global liquidity are among the factors that have spurred renewed investor interest in India.
“Perception of the business environment has improved significantly in the last 12 to 18 months. Expectation is that the Indian economy has bottomed out and is back on the growth story," said Ketan Shah, head of investment banking at Daiwa Capital Markets India Pvt. Ltd.
According to Shah, most companies that have been banking on the Chinese market to power their growth would be looking to diversify.
“In a survey, several Japanese manufacturing firms pointed out that over the long term, India is the top priority for them," said Shah.
Valuation expectations of Indian firms have also moderated, allowing for deals to close.
“The valuation expectations among companies have been re-calibrated and sellers are willing to consider more realistic valuation expectations for their businesses. The average P/E (price to earnings) multiple is around 18, which is considered a good point for entry. It reflects a good opportunity going forward and also reflects healthy earnings," said Kalpana Jain, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd.
Sectors such as information technology (IT)/IT-enabled services (including e-commerce), pharma-healthcare and manufacturing are seeing the maximum deal activity. Foreign investor interest in core infrastructure sectors is still limited.
“A lot of clarity is needed on the infra side, especially in the power sector where coal linkage, power purchase agreements and evacuation of power still remain a challenge. Financial restructuring of assets and lower interest rates will help the sector," said Gaurav Gupta, managing director and head, Macquarie Capital India. “Overall, for the M&A and investment environment to improve, resolution of land bill, power, and the goods and services tax are the most important steps going ahead," Gupta said.