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Proactive M&A approach foreseen
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Rapid expansion-led M&A will be replaced by boards and CEOs focusing on reassessing the core versus non-core businesses, attempting to create a differentiated position in the market and also to achieve economies of scale..
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Given the current lull in the deal space, what is the outlook for M&A (merger and acquisition) activity in 2009? Companies will be aggressively looking at corporate restructuring options to unlock value, that is, strengthen the balance sheet and P/L, foresees Mr Rohit Berry, who leads the M&A practice in BMR Advisors (www.bmradvisors.com).
"The focus will be on identifying the opportunities to restructure capital at multiple levels, through de-leveraging or buyback. Some of the restructuring could also trigger M&A within the group, or potential divestments," he adds, during the course of a recent email interaction with Business Line.
From a procedural perspective, Mr Berry expects the enactment of the Companies Bill to simplify the existing norms by providing a `single-window approval' for mergers, easy court-less group consolidation procedure, and enabling provisions for cross-border mergers to facilitate speedy implementation. On an overall basis, he expects the deal space to be active, albeit at 2006-2005 levels, with advisors developing innovative solutions to help companies grow and retain their competitive edge.
Excerpts from the interview:
On the `decline' in 2008.
The year 2007, to a large extent, was a watershed year for M&A in India due to a significant number of large deals such as Tata-Corus ($7.6 billion), Hindalco-Novelis ($6 billion), Vodafone-Hutch ($11 billion).
Normalising the year 2007 deal value data for such large special deals, the total deal value amounts to $27-28 billion. For 2008, on an YTD (year-to-date) basis, the total deal value is already clocking $28 billion with the year still not over.
Therefore, I do not completely agree that there is a decline in deal value in 2008 in absolute terms; but the annual rate of growth in value terms has come down.
On how the factors driving M&A are expected to pan out.
There are certain factors that drive the quantum of M&A activity in general; for instance, greater stability in the stock market, demand led high business growth, cheaper and readily available financing, etc.
As these conditions are not expected to be met in the near term, in a scenario of overall slump in valuations, there could be moderation of the total deals in value and volume terms in 2009.
At a macro level, the driving force for the M&A activity in India will be relatively higher economic growth fuelled by domestic consumption, weaker rupee and attractive share valuations.
At a company level, focus on M&A will stem from the need to expand or consolidate presence in the emerging markets like India and China, renewed focus to achieve cost efficiency aimed at protecting margins and relative maturity of various industries. Companies will look at opportunities for monetising their supply chain and internal utilities, so as to free up capital and bring in higher cost productivity in the long run. In the Indian context several industries are transitioning from a `pioneering' phase to a `rapid growth' phase. The current economic environment is likely to trigger consolidation in some of these industries like IT/BPO, pharma, retail, etc., both inbound and outbound.
On the shifts that will happen in the approach to M&A and the structuring of deals.
In the current economic environment, rapid expansion-led M&A will be replaced by boards and CEOs focusing on reassessing the core versus non-core businesses, attempting to create a differentiated position in the market and also to achieve economies of scale. The result will be a more proactive M&A approach with a view to create long-term sustainable value for all the stakeholders.
Companies with good credit rating and those which have raised funding before the current crisis may actively pursue M&A to make `value' buys. Stock could replace cash as the acquisition currency. This will work well from the sellers' perspective as it would give them the benefit of relative valuation and an opportunity to participate when the tide turns.
On the challenges for M&A activity in 2009.
Cost and availability of finance will be the most important challenges faced by the buyers. In the past the Indian companies have been able to acquire companies bigger than their size on the basis of the balance sheet of the acquired company.
However, as banks and financial institutions are already under pressure, the companies may find it difficult to obtain debt from banks for financing their acquisitions. This may also affect cross-border acquisitions by Indian companies in the short-term. Some large corporate groups have already deferred their acquisition plans.
On PE (private equity) investment and funding in 2009.
With the economic downturn in the developed economies intensifying, pressure on ROI (return on investment) on the overall portfolio and with limited exit opportunities, overall PE investments are likely to witness a drop as evidenced in the 2008 YTD investments figures of $10 billion from approximately $19 billion in 2007.
Emerging markets such as India and China will be regarded as potential safe havens and are likely to attract a fair share of investments.
Some of the anti-cyclical measures expected from the Indian government - for example, increased spending on infrastructure etc. - will provide significant investment opportunities in India.
Further, the gradual change in the Indian entrepreneurs' perspective regarding stake dilution in favour of PE funds owing to significant slowdown in fund-raising from IPOs (initial public offerings) and the capital market, debt being more expensive, could lure PE investments as well.
Some of the measures around creating a specific regime for investment and taxation of PE funds (for example, the introduction of limited liability partnerships, flexibility in using hybrid investment structures, and removal of restrictions on entry/exit pricing or restrictions on sectors available for investment) can act as catalysts for increasing India's share in the overall investment pie.
Bio: A commerce graduate from the Delhi University and a qualified chartered accountant and chartered secretary, Mr Berry was a tax partner with Ernst & Young and led the M&A group within its tax practice, before joining BMR. He had worked with Arthur Andersen for over eight years until the Andersen practice was combined with that of Ernst & Young in June 2002. Mr Berry has nearly two decades of experience in financial, fiscal and regulatory matters working with multinational and domestic corporations across a range of industries. He has advised clients on a variety of complex transactions which involve issues relating to the establishment, expansion, restructuring and divestment of businesses in India. He is actively involved in Japanese client initiatives and has served a host of Japanese companies engaged in a diverse range of businesses in matters relating to entry strategy, opportunity assessment, feasibility analyses, business realignments, and exit structures.
D. MURALI
InterviewsInsights.blogspot.com
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