The Hindu Business Line : Deal Street: ‘Cycles are getting stretched’

“In IT/BPO space, deals are always smaller. Financials
are also another sector that may see a lot of traction in 2009-2010 period. Entertainment, media, construction
and logistics have good prospects too.”

D. Murali Kumar Shankar Roy

Chennai, July 26 Take out the mega Tata-Corus and Vodafone-Hutch deals; the much-publicised slow-down in Deal Street is not much to worry about, say experts.

For the first half of 2008, there have been deals worth $18.5 billion as against $44 billion during corresponding period in 2007.

“While this seems like a great fall in deal activity, it is actually not so considering that over 70 per cent of last year’s deals happened in the first two months of the year. It was an extraordinary 2 months where 3-4 historical deals took place and we cannot expect history to repeat itself too often,” feels Ms C. G. Srividhya, Partner (Valuations) of Grant Thornton, which tracks deals. The number and size of deals is more affected by stock markets, remarks another expert.

“Demand suffers in a scenario such as one we are facing now. Capital costs naturally go up and at the end of this vicious cycle, supply falls. With the stock market dipping, sentiment has turned negative. Unlisted companies may suffer more in terms of getting better valuations than the listed peers,” says Mr Sanjeev Krishan, Executive Director, PricewaterhouseCoopers.

Advantage PE

Mr Krishan also feels that this situation, however, presents ample opportunity for private equity (PE) and that they may come back in 2-3 months and seal some good deals as they look forward to another 10-15 per cent crack off in the stock markets. The total number of PE deals during the first 6 months of 2008 stands at 194 with an announced value of $7.54 billion, as against 195 deals amounting to $6.77 billion during the corresponding period in 2007.

“Several private equity funds are still keen on making good investments as they have to utilise their corpus effectively,” says Ms Srividhya.

Many PE funds are keen to invest in buy out transactions or fund acquisitions, but are looking for a good value proposition. “While the deal momentum in both M&A and PE is still good, the deal cycles are getting stretched, as both acquirers and investors are keen to complete the transaction at the right price and at the right terms, hence taking more time to decide,” she adds.

Hot sectors

While experts agree on the IT/BPO sector, some feel financials and logistics may see action whereas pharma is another favourite for some.

“In IT/BPO space, deals are always smaller. Financials are also another sector that may see a lot of traction in 2009-2010 period. Entertainment, media, construction and logistics have good prospects too,” notes Mr Krishan.

Consolidation is likely in IT, BPO and pharma sectors, feels another expert. So, is there a chance of more domestic deals happening in the coming 12-15 months?

“There could be more domestic deals in the sectors where consolidation becomes important to sustain and grow. There is also a chance of more outbound cross-border deals, especially with the drop in international company valuations. But these cross border deals need to be wisely evaluated after a thorough due diligence on the international companies’ fundamentals, current order book, business potential etc in the present scenario,” Ms Srividhya opines.

Mr Krishan agrees. “Domestic deals are better-placed at this juncture as for domestic companies; allocation of resources seems to be tad difficult for foreign acquisitions now. Once the Government stability issue and high-oil price environment settles down, businesses will re-align themselves to the high-cost scenario.”

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