Will the year 2010 see M&A (merger and acquisition) activity of the 2007-08 level? “With the economy on the right track to recovery, one may be tempted to say ‘yes,’ but we are still in recovery mode, so the pace of recovery in the first half of 2010 would really determine the answer to that question,” observes Sanjeev Krishan, Executive Director-Partner, Transactions Group, PricewaterhouseCoopers P Ltd, Gurgaon ( >www.pwc.com/in ).
A recovery in the credit markets would help the process; in India, smaller deals may dominate in 2010, as acquirers, especially PE (private equity) buyers, find those easier to afford, he adds, during the course of a recent email interaction with Business Line . “The other key challenge is on the valuation side, and in recent times, value expectation gap between buyers and sellers has been up to 4 times EBITDA (earnings before interest, taxes, depreciation, and amortisation).”
Excerpts from the interview.
What have been the M&A trends over the past year and how do you perceive M&A to progress in 2010?
2009 has been quite a mixed bag – it started off with most of the corporate world adopting a “wait and watch” stance considering the global financial turmoil and the credit crunch.
However, economic recovery, both globally and more importantly in India seem set to create greater M&A opportunities as the year closes. Deals in North America were valued at $115.6 billion in November, the most since September 2008, with deal volumes being five times what they were in February.
In India too, we have begun to see foreign strategic investors return to the markets; the relatively healthier macro economic indicators in India and other emerging markets are anticipated to create greater inbound M&A traffic in 2010 – telecom, oil and gas and banking sectors appear to be key sectors, with healthcare, education and mid-market IT service segments also maintaining decent deal interest.
Your take on what the key themes will be for outbound and inbound M&A in 2010.
Significant themes to Indian outbound M&A in 2010 are likely to include acquisition of distressed assets, acquisition of niche technology / design centres, hunting strategic energy sources and acquisitions in newer emerging economies.
It is anticipated that 2010 would see further consolidation in the US and Europe, and this is likely to result in a number of overseas opportunities being available to India Inc.
The key challenge to all of the above would of course be the availability of credit, and associated costs; debt is clearly 200-400 basis points more expensive now then in 2007, and this would be a key factor for Indian companies looking to transact overseas.
This in some ways would eliminate the “me-too” players. The oft-abused word “synergy” is becoming important again, with valuation multiples expected to settle in the 5-7 times EBITDA range, and flat businesses attracting a discount.
Inbound M&A has already shown revival thanks to the growing purchasing power of the Indian consumer and the quick turnaround which the Indian economy showed over the last year; presence in the Indian market is a way to hedge risk as well as an opportunity to prolong the productive life of mature products of the developed economy.
Going forward, the key inbound interest is expected in pharmaceuticals, healthcare, financial and engineering services and the consumer sectors. The prime reason for this is the anticipated growth rate of over 7 per cent in the Indian economy.
On PE activity.
Year 2009 witnessed a significant slump in the PE activity driven mainly by the global turmoil; in India there was a clear mismatch between sponsor expectations and what the PE investors were willing to shell out at this point in time; this is attributed to the hard time that PE investors have experienced globally and the run up in the Indian stock markets, as a result of which sponsor expectations have remained very high.
Considering the demand-supply imbalance in key sectors such as infrastructure, power, education and healthcare, it is expected that these would be see active PE activity in 2010.
Do you see the Indian buyers increasingly savvy in the global M&A space?
Unlike during 2005-2008, when a number of Indian businesses ventured out for the first time, most Indian companies are now more experienced in dealing with the overseas M&A markets, and also confident in their dealings with the western vendors and their advisors.
Coupled with the prolific investment profile of Indian companies over the last four years, and their ability to acquire distress overseas assets and make them work, Indian companies are now considered to be serious contenders for acquiring global businesses, and both western vendors and advisors are actively reaching out to them to discuss potential global divestitures.
This transformation has been aided by Indian companies’ reasonably good track record in integrating overseas acquisitions, an enabling regulatory environment, and enhancement of transparency in Indian financial reporting – all this has made overseas vendors more comfortable about Indian businesses ability to finance / manage / integrate acquired businesses.
