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Fewer mergers in 08 as companies hold on to cash

By Dhriti Ranjana Ray in New Delhi
December 23, 2008 13:44 IST
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Not so long ago, it was highly fashionable to raise a toast to mergers and acquisitions, but champagne was mostly banned from boardrooms in 2008 as business expansion became a bad idea in an era of economic uncertainty.

The total number of M&A deals announced till December 15 stood at 445 and its combined value was $30.72 billion, according to global consultancy firm Grant Thornton said. It hardly a match to last year's 676 deals worth $51.11 billion.

Though the pace of global M&A is likely to slow down in 2009, largely due to the lack of credit, volatile equity markets and weak confidence among companies to pursue transactions, an unprecedented decline in valuations would spark some opportunistic buying, industry experts say.

"Deal Activity in India in 2009 would no doubt be impacted by the global economic slowdown. Key challenges are the lack of financing available for outbound transactions, and continued unreasonable valuation expectations in the private markets," auditing firm PricewaterhouseCoopers executive director/partner, Transactions Group, Sanjeev Krishan said.

Meanwhile, consultancy firm Dun & Bradstreet president & CEO  India Manoj Vaish said: "At this point of time, financing is a major issue besides the restrictions in the external commercial borrowings have limited the foreign borrowings to finance acquisitions."

Vaish further added: "We expect the M&A market to reflect moderate activity in 2009 with the theme being more of consolidation and rebalancing of business portfolios than the aggressive growth intent in the past year".

Due to the credit crunch across the globe, many companies would find it difficult to sustain themselves, and this would lead to an opportune time for other companies with strong balance sheets and availability of liquid cash balances to do aggressive shopping, market analysts said.

"Next year, there would be a dip in the activity due to the continuing credit market tightness and uncertainty in the global economic scenario.

"The rationale for mergers and acquisitions in India most likely would be the desperate sale by the needy companies to strong companies," said Jagannadham Thunuguntla, equity head of Nexgen Capitals, the merchant banking arm of brokerage firm SMC Global.

However, amid the global economic slowdown, opportunity surely exists for Indian companies that have cash or who can organise finance and be able to leverage on this opportunity, industry experts said.

One interesting factor that has surfaced in the present scenario is the fact that despite the slowdown in the global economic scenario, the Asia Pacific region is showing signs of resistance.

According to data compiled by Grant Thornton, of the total cross border deals, there were 193 outbound deals wherein Indian companies acquired businesses outside the country with a value of $13.15 billion and 81 inbound deals where international companies or their subsidiaries acquired Indian businesses with an announced value of close to $12.48 billion.

Krishan further argued that 'it is critical to understand that growth plans cannot be deferred forever and if we have to maintain our overall growth numbers, there would be a need to feed businesses with capital, technology, management expertise, which would result in M&A activity.

Similar views were echoed by Grant Thornton Partner, Specialist Advisory Services CG Srividya said: "...irrespective of the volatility in economy and market.

After several years, we have seen a significant amount of high value inbound deals, showing the increasing interest in and the attractiveness of Indian businesses to international companies."

Meanwhile, KPMG India Corporate Finance Group executive director Gaurav Khungar has also reiterated similar sentiments and said: "Overseas companies will increasingly prospect opportunities in India.

However, given the global liquidity issues, the gestation period from beginning discussions to completing a transaction will be much longer.

"Indications are that the year 2009 may see several proprietary conversations on transactions, however, fewer completed deals."

Khungar further said Indian corporate, while going for overseas transactions, should have the knowledge of international regulations, process designs, years of accumulated experience, strategic and commercial intelligence so that they do not stretch themselves to do merger and acquisitions by taking extra leverage on their balance sheet, are already feeling the heat.

Many high profile deals such as last year's Tata Steel-Corus transaction, this year's Tata Motors-Jaguar Land Rover deal and Suzlon-REPower deal are putting pressure on the ratios of the acquiring companies, such as -- Tata Steel, Tata Motors and Suzlon amid the credit market crisis and capital market correction.

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Dhriti Ranjana Ray in New Delhi
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