September quarter M&A volume lowest in six years

September quarter M&A volume lowest in six years

Mumbai: The volume of mergers and acquisitions (M&As) in the July-September quarter fell to its lowest in six years, with deteriorating economic conditions and lower valuations prompting companies to defer plans.

The volume of India-centric M&As was $4.7 billion, the lowest in six years since the second quarter of 2005 ($4.1 billion), according to data released by Dealogic, an investment banking data provider, for the third quarter ending September this calendar year.

At a time when the global M&A volumes were up 7% for the first nine months ended September, Indian markets saw volumes drop 31% because of higher valuations of firms and fears of an impending slowdown.

Globally, M&A volume totalled $2.15 trillion during the first nine months of 2011, up 7% over last year, but volumes in the third quarter dropped 23% to $599 billion against $783 billion in same period last year.

Experts are attributing this slowdown in deal activity to the deteriorating economic conditions and lower valuations linked to equity markets.

“Today, with the kind of subdued mood in the US and Europe, the board of a large multinational company is unsure of committing capital to buy assets overseas," said Avinash Gupta, head, financial advisory at Deloitte Touche Tohmatsu India Pvt. Ltd. “Besides, there are no good assets available for sale in India."

Gupta also said summer was a slack period for deal making in Europe and the US, and therefore, a quarter-on-quarter comparison can’t be made.

Although drastic, the drop in volumes is not a testimony of India taking a beating as an investment destination.

“There is lot of meaningful dialogue happening now. Only the serious players with an intent to grow are looking to acquire assets, both in India and overseas," said the head of M&A with a foreign investment bank, who declined to be named. “There is a healthy pipeline of deals that has been built up but nothing is going through in such an economic environment."

It’s not that deals are taking longer to conclude. Some Indian and multinational firms have even started rethinking their inorganic growth plans. “Some clients that were very keen on buying technology-led assets overseas have shelved plans and are rethinking on how the same capital can be used to bring down operational costs of the company," the banker said.

Since January, the CRB Index, a basket of global commodity prices, is down 9.12%, but is flat compared with the same period last year. This comes at a time when the rupee has fallen about 11.5% against the US dollar in the past two months, denting earnings and profitability of companies.

“While some companies with enough cash would want to wait for some time to get better valuations, most of the companies are battling to put their own houses in order and might not have the financial resources to take on acquisitions," said Krishnamurthy Subramanian, assistant professor, finance, at the Indian School of Business, Hyderabad. “To add to this, lenders have become skittish as with rising interest rates, M&A financing is not easily available."

Unless there are some signs of economic activity bouncing back to normal and the government moves ahead with its reforms agenda, deal activity will continue to be muted. “Unless the triggers driving the deal activity are back in the market, the rest of the year is going to be slow," Gupta said, adding the world has to stabilize before firms start spending on acquisitions again.

India-centric M&As were the third highest in the Asia-Pacific region (ex-Japan) at $39 billion, accounting for around 10% of the total deals in the region, after China ($134.7 billion) and Australia ($104.9 billion). Of this, BP Plc.’s $7.2 billion buy of a 30% stake in 21 oil and gas leases of Reliance Industries Ltd is the biggest deal announced in India so far this year.