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James Winterbotham
Sridar Swamy

Indian M&A (mergers and acquisitions) has seen two distinct changes since January 2008. First, following the precedent of the Ranbaxy deal, it is now possible to contemplate Indian promoters giving up their flagship businesses, and second, hostile takeovers are back on the agenda. When the Singh family sold Ranbaxy Laboratories to Daiichi Sankyo it took everyone by surprise. This deal may well have opened the door for other such transactions in the future. Indian promo ters, who were considered to be sentimentally attached to their businesses, are now analysing their business portfolio and may be willing to cash out at right values.

Hostile takeovers, taboo in the Indian corporate world, are suddenly being talked about. Emami is in the process of acquiring control of Zandu through a hostile takeover. Ranbaxy Laboratories had also taken a significant stake in Orchid Chemicals and forged a strategic tie-up with the company. Of late there has been news of Videocon acquiring a stake in Archies and Temptation Foods acquiring in Kohinoor through market purchases. The success of one hostile takeover will pave the way for more.

In line with the rest of the market, Indian M&A activity in H1 2008 has also fallen, for the first time since 2004. But a number of big ticket acquisitions in the later months of the first half signal the opportunities that the corporate world sees in a falling market. The total volume of M&A and private equity (PE) deals in H1 2008 stood at Rs 92,800 crore (US$ 23 billion), down 15 per cent from Rs 1,09,700 crore ($27 billion) in H1 2007. The number of deals was down by 8 per cent from 423 in H1 2007 to 388 in H1 2008, and the average deal size also decreased from Rs 260 crore ($63 million) in H1 2007 to Rs 240 crore ($60 million). Though the first quarter saw more number of deals with 197 deals worth Rs 41,300 crore ($10 billion), the second half saw comparatively larger deals, the average deal size being Rs 270 crore ($67 million).

International acquirers continued to account for the bulk of domestic deals with a 67 per cent share in the total deal value but this share has fallen sharply from the 78 per cent share in H1 2007, a decrease of 27 per cent in total value of deals.

Strategic investments, as opposed to PE deals, continued to dominate M&A activity with a share of 70 per cent. In total there were 245 M&A transactions worth Rs 64,700 crore ($16 billion) with an average deal size of Rs 260 crore ($66 million) as compared to 301 deals worth Rs 88,600 crore ($22 billion) in H1 2007 with an average size of Rs 290 crore ($72 million).

In H1 2008, the share of PE investments in the total deal value was 30 per cent, up from 19 per cent in H1 2007 but at par with 30 per cent for the full year 2007. The US continues to dominate the PE deal activity with a 48 per cent share followed by 15 per cent from Europe and 10 per cent from Asia (ex India). The share of PE investment into listed companies (“PIPE” deals) has fallen from 33 per cent in 2007 to 17 per cent in H1 2008.

In all there were 143 PE transaction Private Equity Deals in India worth Rs 28,100 crore ($7 billion), a growth of 33 per cent over H1 2007 in value terms. Telecom was the most favoured sector for PE investments with a 17 per cent share. The second most attractive sector was media with a few large investments constituting 14 per cent of total PE investments, followed by real estate with 13 per cent share and the power sector with 12 per cent.

Other major sectors included finance (10 per cent), textile (5 per cent), infrastructure (4 per cent) and oil and gas (4 per cent). The largest PE deal during the period was Nimesh Kampani, the chief of JM Financial, investing Rs 2,600 crore ($651 million) in Hyderabad-based media group, Ushodaya Enterprises.

In 2007, Blackstone’s proposal to invest in the company was stalled amidst political pressure. Other major deals include Providence Equity Partners acquiring a 20 per cent stake in Aditya Birla Telecom Ltd for Rs 2,600 crore ($640 million), Ashmore Group acquiring a 35 per cent stake in Sweta Estates Pvt Ltd for Rs 2,200 crore ($550 million) and LN Mittal and Farallon Capital acquiring a 29 per cent stake in Indiabulls Power Services for Rs 1,600 crore ($395 million).

M&A activity in H1 2008 continued to be broadly based across a range of sectors. This year (2008) has seen consolidation in the pharmaceuticals industry, which overtook the telecom and IT sectors as the dominant industry with a 24 per cent share of total deal value. Telecoms came second with a 19 per cent share, followed by finance (18 per cent), media (6 per cent), real estate (5 per cent), cement and building material (4 per cent), power (4 per cent) and oil and gas (3 per cent). The historically active information technology sector was quiet with a mere 1.8 per cent share.

Road blocks on the way: After the flood of deals last year, the recent experiences of Indian companies suggest that the tide for corporate India’s overseas aspirations might be turning. Be it Essar’s attempts to buy Esmark of US, Sun Pharma’s ongoing bid for Taro of Israel or Sterlite Industries’ bid for Asarco’s mining assets, a number of Indian companies have failed to achieve their targets.

Essar withdrew its bid for Esmark after Severstal announced a higher bid which also has support of the United Steelworkers Union. Taro withdrew from its $454 million merger agreement with Sun, citing differences on pricing and the financial turnaround Taro achieved, and Sun Pharma has since launched a hostile bid for Taro. In the case of Sterlite, the former parent of Asarco, Grupo Mexico, has submitted a bid after Sterlite was short-listed as the preferred bidder and the final result is yet to be declared.

In H1 2008, there were 111 deals worth Rs 40,500 crore ($10 billion), less than half the value of deals in H1 2007 (90 deals worth $27 billion) with an average deal size of Rs 360 crore ($90 million) versus Rs 1,200 crore ($296 million) in H1 2007. But the increased number of deals with reduced average deal size does underline increasing participation from mid-sized and smaller companies in overseas acquisitions.

Europe and the US remained the favoured destinations with a combined share of 86 per cent versus 81 per cent in H1 2007, but with the positions reversed: Europe’s share has gone down from 54 per cent to 41 per cent and the US share has gone up from 27 per cent to 45 per cent during the period.

The largest announced deal during the period was India’s leading copper producer, Sterlite Industries, a flagship company of Vedanta Group, acquiring the bankrupt American copper producer Asarco LLC for Rs 10,400 crore ($2.6 billion). However, the US bankruptcy court has allowed Grupo Mexico, which lost control over Asarco three years ago on filing for bankruptcy, to bid and present its reorganisation plan for Asarco.

Another historic deal for India Inc was by India’s largest automobile company Tata Motors. The company acquired Ford Motor’s two luxury brands Land Rover and Jaguar, whose combined revenues are twice that of Tata Motors, for Rs 9,400 crore ($2.4 billion).

In H1 2008 the automotive sector dominated overseas M&A activity with a 26 per cent share. The share of metal sector dropped from 68 per cent in H1 2007 to 26 per cent in H1 2008. Other sectors attracting large investments were specialty chemicals with a 10 per cent share, oil and gas with an 8 per cent share and information technology with a 5 per cent share.

With the non-availability of finance and the changing economic scenario, H1 2008 has seen drop in M&A activity both domestically and overseas. A deal that was possible in 2007 may now be perceived to offer too high a risk owing to inflation, increasing financing costs and other factors.

Over the long term the M&A market is likely to continue to track the fortunes of the Indian stock market.

However, the Ranbaxy deal may well be a pointer towards an increasing number of deals where Indian promoters surrender control of their businesses in order to participate more effectively in global market as part of larger groups.

Lower valuations may also attract further corporate activity among listed companies. The outlook, however, is likely to remain subdued. If the Government relaxes the foreign investment limits for telecom, print media and retail, these sectors could all see a significant amount of deal activity in the coming years. In the short term, however, the uncertain political outlook is yet another cloud on the horizon.

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