India is seeing deal activity comparable to 2007 levels: KPMG
Leif Zeirz, Rohit Berry of KPMG discuss the current M&A and private equity (PE) environment and the key factors influencing deal making in India
Mumbai: Merger and acquisition (M&A) activity in India surged in 2017. Deal values increased by 53.3% while deal volume rose by 2.5%, fuelled by a wave of consolidation across sectors. With deal activity globally touching the peak levels of 2007, these are interesting times for deal advisers for India as well, where valuations continue to be high despite some moderation in the recent months.
In an interview, Leif Zeirz, global deal advisory leader at KPMG, and Rohit Berry, deputy head of deal advisory at KPMG in India, discuss the current M&A and private equity (PE) environment and the key factors influencing deal making. Edited excerpts:
It’s been a renewed period of global growth. These must be very interesting times for deal advisers.
Zeirz: Generally we are living in very good times as deal advisers. The markets globally are very positive and while a year or two ago this was mainly a statement that was valid for the Western and more mature economies, now basically across the board we see a very positive market environment. This is mainly driven by the very low interest rates and relatively cheap money, especially in the Western economies, (as well as the?) high liquidity situation with many companies backed by solid profit situations. Yes, there was also an impact of lower commodity and oil prices, which benefit some countries (like India) and may not be as good for the exporting countries in this sector.
What is the deal activity and valuations scenario in India at present?
Zeirz: Looking at the deal activity and prevailing high multiples, I have to say that present times are almost comparable to the levels witnessed in 2007, which was an all-time high for M&A. However, if you analyse the substance behind these numbers and comparisons, we find very different attributes. Valuations are still high in India, though some moderation in the recent past has helped. At least they are not at the prohibitive levels we witnessed as international community a few years ago, which made it very tough to do sensible deals. A good capital market, strong regulatory reforms, including the insolvency law, are signs of depth and maturity and this makes the Indian market attractive.
Berry: The past year has been a strong one for deal activity, with booming capital markets, witnessing almost $11 billion of IPOs, providing both much needed capital to participating companies and lucrative exits to private equity players. Overall, strategic M&A came down, given the temporary disruptions and distractions owing to demonetisation and GST. We did not see too many billion dollar deals, and some big merger proposals in financial services and telecom did not come through because of regulatory and other challenges.
Private equity funding, on the other hand, went up 64%, even with a lower deal count, to almost $23 billion. Strong business models were backed and pragmatism generally prevailed.
What is your view on outbound investments by Indian companies? It has not been the most active.
Zierz: Admittedly, when it comes to private equity exits or big sales of assets in an international market, Indian companies have not been active in the last few years, and I am sure for good reason. So they will not very easily or naturally be pursued when such sales or exit happens.
Berry: The pre-Lehman days, when there was a heightened activity on India outbound did not on an overall basis, barring some exceptions, yield good results. There was hence a slowdown and lessons were learnt. Outbound activity has since been more measured.
A deeper analysis for growth drivers is being done, as is introspection of management bandwidth to handle foreign assets. Technology and market access aspects are being debated between inbound and outbound partnerships. The technology sector, with strong cash in balance sheets and foreign market experience, have to go outbound.
Is the current regulatory environment conducive to exploring innovative deal structures? How do you view the changes ushered in by the Insolvency and Bankruptcy Code?
Rohit Berry: The progress is good. It is evolving as always and should continue to improve. This is a necessary supplement to a more progressive mindset among Indian promoters as they seek to restructure their asset portfolio in terms of core and non-core and make decisions on sales investment and partnerships. With respect to the Insolvency and Bankruptcy Code, the government has been pragmatic and flexible in fine tuning it on a regular basis as the situation unfolds. The new law is certainly not about loan recovery or part of it through liquidation but recovery through passing on the assets to newer and more experienced and eligible hands for turnaround. This is extremely vital for the economy and the job market at large.
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