India Inc back on Cross border M&A trail

Thursday, July 15, 2010 | Posted by: Grant Thornton
Categories: | Tags: India, investment, Grant Thornton, M&A, South Asia Group, deals, South Asia, mergers, acquisitions, Sanjeev Gandhi

Predictably 2009 saw a significant drop in M&A activity in India. As sentiment picks up with the global economic recovery, we are seeing definite signs that India Inc. is once again ready for a sustained cross-border deal-making trend.

2009 was characterised by companies focused on managing internal costs and preserving cash. The first half of 2010 has seen a dramatic pick-up in deal activity as capital markets rebound-there were 365 M&A transactions during the first 6 months of 2010 of which 102 were outbound cross-border deals by Indian corporates. In contrast the same period in 2008 saw only 128 transactions with 31 outbound deals .We expect this trend to continue and see India being a major player on the global M&A scene going forward.

Unlike the previous phase of M&A out of India which involved big-ticket deals -e.g., Tata’s acquisitions of Corus and Jaguar Landrover and HCL’s acquisition of Axon- we believe that this next phase of outbound activity will be characterised more by mid-market transactions. Indian corporates are more thoughtful on their M&A pursuits and the focus is on strategic fit and synergy benefits-they are seeking bolt-on acquisitions which brings new skills, customers, service offerings and the opportunity to improve profit margins without the risks of integrating a large transformational acquisition. Structurally, relative valuation metrics for acquisition targets outside India are favourable and ,coupled with a strong rupee, this means that Indian companies are in a strong position to bid for and buy assets overseas. Strong balance sheets and ready access to capital in India provides another impetus for sustained M&A activity.

 

From an outbound perspective, we expect significant M&A activity within the Technology ( IT Services/Business Process Outsourcing ) , Automotive components and Branded household goods (FMCG) sectors. In the Technology sector, for example, most corporates in India are cash-rich and see an opportunity to pick up assets at relatively good valuations. There is significant interest in , for example, UK based IT services/BPO companies selling into the Financial Services sector and Remote Infrastructure Managed (RIM) companies given the offshoring opportunity to utilise unused capacity in India.  Within the Automotive sector, Indian engineering/manufacturing corporates are scouting for targets in the fragmented auto-components markets in Europe as the global economy recovers and automotive demand picks up.

Inbound M&A by foreign corporates into India is also on the rise albeit more subdued currently given the fragile recovery in western countries. Rising consumer demand in India clearly provides a significant market opportunity and we expect increasing M&A activity within sectors such as mobile telecoms, pharmaceuticals, consumer banking and finance, infrastructure and food retail. Clearly, evolving political reforms in certain sectors such as relaxation of Foreign Direct Investment (FDI) rules in multi-branded retail outlets will accelerate deals into India.

In summary, there is renewed desire from Indian corporates to globalise-paradoxically the more restrictive global economic environment has provided well capitalised Indian companies with an opportunity to either scale up their existing overseas operations or enter new markets for the first time. We believe they are poised to take advantage of this scenario over the next 12-24 months.

Sanjeev Gandhi
Head of M& A for South Asia Group
For Grant Thornton UK LLP