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Saturday, May 25, 2002

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Significant M&A activity in offing: A.T. Kearney survey

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WITH globalisation gradually taking firm roots in India through reform measures being implemented by the Government at a "sustainable'' pace which, by its own admission, is slow on account of the "human face'', mergers and acquisitions (M&As) in the corporate sector is set to become the order of the day.

Already, corporates have geared up and, as a part of the exercise to tackle the impending global competition, many Indian companies have already participated in the M&A process, but with diverse results. In a business scenario where survival is for the fittest, some corporate entities have zeroed in to their core competencies while others, unable to bear the competitive onslaught, have joined hands or merged with the "big brothers'' to stay afloat.

In India, however, not all mergers and acquisitions have created value just as, internationally, a large proportion of M&As have failed to achieve significant benefits.

The reason for this, according to Mr Arthur Bert, Managing Director, South Asia, A.T. Kearney Australia Pty Ltd., is not wrong strategy but failure due to incorrect execution. The winners in the merger game, he says, are those who create significant shareholder value.

Sharing some insights of a detailed in-house survey with a select group of newspersons here, Mr Bert, who has just been appointed to his new post as MD, South Asia, said that the findings assume significance as in India, many industries are still in the phase of consolidation. Moreover, the M&A activity is more active and pronounced in the accumulation and focus stage of industry evolution.

A.T. Kearney, Mr Bert said, firmly believes that significant M&A activity could potentially be in the offing and the drivers of such activity would be sectors like pharmaceuticals, cellular phones, software, banking and cement. The benefits through the M&A process for each sector is varied.

For instance, in the pharma sector, the benefits may emanate from the sales force and distribution network combination leading to scale advantages; expansion and/or complementing of product portfolio offering; access to research and development (R&D) and new molecule pipeline and more importantly, the bigger entity in the merger will be able to leverage India as a low-cost bulk drug production base.

In cellular phones, it is the consolidation and scale acquisition before the planned IPOs by the major cellular players. Besides, while increased competition and investment needs would lead to the exit of small companies, the large players would have considerable financial leverage, apart from scale benefits from contiguous circle operations.

In software, while there will be and is increased competition due to setting up of local software bases by global players, the technology slowdown has rendered the small and medium software players as very attractive merger targets. The benefits of merger in such cases would be the acquisition of enhanced R&D and other technical capabilities along with diversification of the client base so as to reduce risks.

Similarly, in banking, the relaxation of ownership norms for private banks would lead to leveraging cross-selling opportunities through merger of the customer base. Also, with the emergence of universal banking, operating costs can be reduced by attaining economies of scale through the operation of ATMs.

For global players in the cement sector, the major attraction for M&As would be the faster entry into the Indian market through the acquisition route as compared to setting up greenfield ventures which will also lead to distributed manufacturing facilities to achieve an all-India presence. Besides, another attraction is the large number of sub-scale players coupled with the low valuation of small and medium level companies.

All in all, for A.T. Kearney, India provides a happy hunting ground for consultancy business which, according to its internal estimates, is likely to grow by about 15 per cent annually.

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