The Hindu Business Line : Negotiations and due diligence are taking longer than usual

Deals in the Indian market fell by 38 per cent in value in the first half of 2008 compared to 2007. This could be attributed to the widespread rupee fluctuation, and the slowdown in the developed markets which seem to have hit the outsourcing boom. - MR RANJAN BISWAS, NATIONAL DIRECTOR, TRANSACTION ADVISORY SERVICES, ERNST & YOUNG.

What is the outlook for cross-border deals in the coming 12-15 months? "There is likely to be a decline in cross-border deals," feels Mr Ranjan Biswas, National Director, Transaction Advisory Services, Ernst & Young. "Outbound deals (Indian firms acquiring overseas), which has so far been very strong for Indian companies, will be a challenge in the coming times, given the low business confidence and the rising cost of funding," he explains, during the course of a recent email interaction with Business Line.

A silver lining, however, is that Indian companies with strong balance sheets and risk appetite would find some attractive targets in the US and Europe as valuations are extremely tempting, especially in certain underperforming sectors such as auto components, engineering, construction, etc., adds Mr Biswas.

On inbound deals, his view is that given the global liquidity tightness, many big deals are not expected. These deals could, however, see a rise in small size investments, especially in the financial services industry.

Domestic deals most likely will increase and consolidation, restructuring, bailouts will see action, predicts Mr Biswas. "Also, PE funds that have been invested now for the past two to four years could be looking at exits. IPOs as an exit option currently do not seem viable and thus, chances of PE funds changing hands are high."

Excerpts from the interview:

On the decline in the number of deals.

There has been a marginal fall of around 4 per cent in the number of deals announced in the first half of 2008 compared to 2007 but deal closures have seen a drop of 27 per cent. A tight credit environment is definitely a prominent factor for the fall in the M&A (mergers and acquisition) activity, but not the only factor, as companies are being hit by rising input costs and margin pressures, while bankers are becoming choosy in their funding for M&A.

Another aspect for the slowdown is that most companies have adopted a wait-and-watch policy. While, we believe that Indian promoters are still ambitious, acquirers have become more astute and cautious. Hence, negotiations and due diligence are taking longer than usual.

On the performance of India in the deal space.

Interestingly, as an investment/target destination, India has been the only Asian market, apart from Japan, to have witnessed a fall in the M&A space. China, Hong Kong and the South-East Asian countries have all witnessed an increase in deals; both in value and volume.

Deals in the Indian market fell by 38 per cent in value in the first half of 2008 compared to 2007, whereas China witnessed an increase of about 70 per cent in deal value. This could be attributed to the widespread rupee fluctuation, and the slowdown in the developed markets which seem to have hit the outsourcing boom.

On the valuations.

At this point of time most PE players are apprehensive about investing in listed companies and are expected to take exposure in private companies. On an industry basis, as we look at the market for the last six months, valuations have shrunk dramatically in industries such as capital goods, real estate, power, financial services, while drop in valuations in sectors such as FMCG and pharma have been moderate.

Deals on the whole are expected to increase due to low valuations, but the driving force could be different across sectors.

On the outlook for sectors.

While sectors such as pharma and telecom infrastructure will have deals due to the growth potential and attractive valuations, sectors like real estate could see activity as a result of survival and compulsion.

On the `real' pressures.

There are many real estate players that are not being able to sustain projects initiated at last year's peak valuations and they are now facing double pressures of increasing cost and reducing sales.

Real estate and infrastructure management sector saw private equity (PE) deals of more than $2 billion in the first half of 2008, nearly three per cent higher than the year-ago period, even as the average deal size fell over nine per cent, reflecting the sluggishness in the valuations.

D. MURALI

(Illustration by R. Rajesh)

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