Today, a key priority for many business leaders is to look for growth opportunities that will help scale up their organization.
A plethora of growth drivers like advancements in technology and globalization, digital transformation, innovation, mergers and acquisitions (M&As), high cash flows, customer-centricity, agility and scalability of operations enable business expansion. While each of these are individually and collectively significant for bringing about the overall progress of an organization, M&As specifically, present several advantages.
In the last couple of years, the Indian economy witnessed a bit of a turmoil due to the introduction of goods and services tax (GST) and demonetisation. As a result, many companies in India weren’t open to M&As, with most of them looking for inward or organic growth. KPMG, in India’s CEO Outlook 2018 survey, indicates that there has been a considerable slowdown in the number of such transactions in the last couple of years—a 10% decrease in the number of M&A deals in 2017. Overall, during this period, Indian CEOs have had a rather low appetite for M&As, with only 11% of them considering it a top priority. The phase is said to be “optic but not yet upbeat", with firms in India still being cautious on variables like soaring oil prices and interest rates.
However, 2018 is being looked at as the year when these deals will finally gain momentum. As per KPMG’s M&A Predictor Report, global appetite for M&As is projected to rise by 5%. Given that the quarter ended March 2018 was good, barring a few macro headwinds, both the Indian and global economy are on an uptake.
Amid a stabilizing economic landscape in the last four to five months, CEOs in India are exuding confidence and interest in the M&A domain. Industries such as financial services, steel, automobile, cement and even real estate are doing quite well. Though the valuations are high, and organizations are not euphoric about big spends, when it comes to stressed assets, there is renewed optimism, especially in the steel and cement industry.
The growing number of cases at NCLT reveal that even pricing for these assets is 10-20% higher than what would have been projected about a year ago. For instance, companies in India have realized that since setting up a greenfield plant takes five years, investing in or acquiring an operating or established project is certainly a viable option.
Globalization in the time of trade wars and tariff barriers is another reason why business leaders in India are open to M&As—using it as a strategic step to make headway in newer markets. Several of them have gone on to set up manufacturing units abroad. Furthermore, cycles in industries such as steel, cement and aluminium are getting shorter and sharper, which makes firms comfortable while buying. These cycles won’t last for five years, but maximum for a year, and they will be back on track with the global cycle being even shorter.
That said, managing macro headwinds is not unfamiliar territory for companies in India. Over the last two decades, they have operated seamlessly, tackling all types of challenges from fiscal deficit to low liquidity.
Rohit Berry is partner and national head, deal advisory, KPMG in India.