The value of announced merger and acquisition (M&A) transactions, involving Indian companies, in 2018 more than doubled to reach $129.4 billion, the highest since 2007 when it was at $67.4 billion.
The availability of an increasing pool of assets as a result of the Insolvency and Bankruptcy Code (IBC) coming into effect has whetted the appetite further.
“When we make acquisitions we look for opportunities which will expand our market presence, boost our technologies, aid in forwarding integration and value addition," Sushil Agarwal, group chief financial officer at Aditya Birla Group, said at the third edition of Mint India Investment Summit 2019. Over the past two decades, Aditya Birla Group has done more than 25 acquisitions, in India as well as overseas.
India Inc. believes that there are three large themes that are driving M&As. One, either protecting oneself from disruption or becoming a disrupter. Two, consolidating or aggregating and three, the availability of capital.
“There is abundant capital in terms of private equity, sovereign wealth funds and pension funds investing in India. I think the next decade and more are for India and you will see a lot of capital coming in," said Navin Wadhwani, head - M&A, Reliance Industries Ltd (RIL). The introduction of IBC has been transformational for the country and it is a complex problem that is being solved, said Wadhwani. “I think it’s working in some ways and it will continue to get better," he said.
There are a variety of reasons why not many deals have happened out of the IBC. It is a new law that has to be aligned as it is evolving, said industry experts. Some operational creditors have also delayed the process, they said, adding that the infrastructure supporting the National Company Law Tribunal (NCLT) cases needs institutional enhancement. In some cases, the lenders also have been indecisive.
The number of announced deals has grown 17.2% from a year ago with 2018 witnessing five deals above $5 billion (combined value of $39.8 billion) compared to only one in 2017 when the $11.6 billion Idea-Vodafone merger was announced, according to data from Thomson Reuters.
For an effective deal, a co-investing or partnership model is highly favoured by investors and companies. For Bain Capital, for instance, the partnership philosophy is in its DNA. Bain Capital, one of the top five global buyout funds in the world, has had more than half of its investments made with corporate partners or management teams or founders.
“There are three categories in deal transactions in India," says Sammonoi Banerjee, managing director, Bain Capital. “First, partnering with strategic partners to chase assets. Second, maximizing the value of an asset. We look to drive a lot of M&A deal with our investee companies. So, we are using existing portfolio companies where we have deployed capital to acquire more and drive consolidation. The last one is backing management teams to create scale platforms," he said.
“I think deal activities will continue, especially India outbound which are driven by a search for capabilities, market share and global divestment which are specific to sectors like consumer, industrials, healthcare," said Shashank Joshi, managing director and
head of global corporate banking India, MUFG Bank. He does not think liquidity is a concern as, despite market volatility, there has been a safe pool of liquidity in the last three-four years. “Our estimate is that it may become a bit expensive but liquidity certainly won’t be a concern in corporate acquisitions."
Though it was expected that with general elections upon India, M&A activity would slow down, for Vikram Hosangady, partner and head of advisory practice at KPMG India, there is no such slowdown in sight.
"We have seen a great number of inflows. Geographically, Japan has seen good inflow while European countries like France are looking aggressively for deals. The US continues to be dominant. We are seeing new investors coming in, especially pension funds," said Hosangady.
Chandresh Ruparel, managing director and head of India, Rothschild agrees with Hosangady.
"Deals around the world are happening primarily for two reasons: disruptions and interventions. Interventions mean regulatory interventions like IBC, GST etc where business models have gone through some change. Financial services, industrials, energy and renewable energy where we can see M&As happening," said Ruparel.
A primary reason for this fillip in M&As is also the legislation and regulatory environment which has undergone a significant change.
"For example due to NCLT, the level of courts; involvement to resolve bankruptcy procedure has reduced. The government has been responding quickly to IBC by plugging loopholes, taking facilitator’s steps to ensure nothing gets stalled, says Sridhar Gorthi, partner at law firm Trilegal, adding that groundbreaking legislation which has brought a complete paradigm shift in a legal environment will take some time to settle down.
"There is a behavioral change that the legislation has brought about. We have seen a significant change in transactions due to the threat of IBC," said Gorthi.