The Hindu Business Line : Cross-border deals set to continue dominance: PwC

M&A activity is expected to remain on an uptrend in the second half of 2007 and the dominance of cross-border deals is expected to continue, according to a PricewaterhouseCoopers report on the deal economy in India during the first six months of the current calendar year.

No mere forecast, it looks like, because the day’s news speaks of the largest-ever overseas acquisition by an Indian IT firm: the Wipro-Infocrossing all-cash deal.

“Consistently strong economic growth, combined with continuation of the reform process and improvements in infrastructure by the Government, is likely to boost FDI too, but significant policy changes appear unlikely,” said the half-year India M&A update called ‘Opening the floodgates.’

The economy witnessed heightened deal activity during the first half of 2007, with the value of M&A transactions crossing $55 billion, spread over 550 deals, far exceeding the total deal value recorded for the whole of 2006.

Speaking to Business Line on the key challenges in the area, Mr Sanjeev Krishan, Executive Director, PricewaterhouseCoopers, said: “One of the key M&A challenges, particularly in case of outbound investments, deals with fi nding the right financing mix for the acquisition. In recent times, Indian companies have faced some interest rate pressures; this is something they will need to deal with.”

According to him, valuation is another issue. “With bidding being the norm of divestment for most key assets, buyers need to be careful about what in their minds is a fair value to pay.”

Mr Krishan also said that another key challenge lies in carrying out an effective integration of operations.

“Large overseas acquisitions will pose a greater challenge, not only to integrate the target company’s culture with that of the acquirer, but to appreciate the key cultural issues and challenges the target is grappling with, on an ‘as-is’ basis. Appreciation of existing dynamics at the target is absolutely critical.”

He added that domestically, the recent changes including amendment of guidelines relating to in-bound investments by way of non-convertible instruments, have created some challenges for structuring experts.

According to the report, segments where FDI cap is expected to be relaxed further include petroleum refining (from 26 per cent to 49 per cent) and civil aviation businesses such as ground handling, maintenance and repair and air charter services, where up to 100 per cent foreign investment is expected to be permitted, against 49 per cent currently.

“The Government is also expected to finalise the guidelines for allowing up to 49 per cent foreign investment in commodity exchanges, which is expected to result in significant investments.”

It added that further liberalisation of the FDI regime is also expected with a plan to exempt several sectors from the mandatory requirements under Press Note 1.

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