The companies surveyed said the most difficult phases of an M&A operation were structuring and negotiation, obtaining financials and post-merger integration.

Horizontal integration is set to take precedence over increasing geographical reach in the mergers and acquisition strategy of major corporates. The tendency to become a conglomerate or diversify into a new sector is set to drastically drop by 19 per cent, according to a new survey by Tecnova.

Interestingly, while financing issues, valuation climate and economic conditions are primary concerns for the buyer, the survey has noted that the least of the concerns was gaining shareholder approval, at a measly 4 per cent, and regulatory issues at 8 per cent.

Acquisition modes

Indian companies appear to be cash-rich, with 70 per cent of those surveyed stating that funding an acquisition would be through cash reserves. Not everyone is averse though, and 60 per cent said they were open to new bank debt, while 43 per cent said they preferred existing bank debt.

Other modes of acquisition include issue of shares, private or public (41 per cent), private equity (30 per cent) and disposal of assets (25 per cent).

Tecnova is a consulting firm specialising in cross-border market entry strategy for multinationals planning to enter the Indian market. In its report on the country’s M&A scene, it has noted that India ranks 20 in terms of global outward foreign direct investment (FDI), with M&As forming almost 50 per cent of the FDI in recent years.

M&As are likely to see an increase of 100 per cent in the next 3 to 4 years, according to the survey. The top destinations for outward M&As for Indian companies appear to be the US, the UK, Germany and Australia. The key sectors of Indian outward investments appear to be professional services, telecommunications, pharmaceutical and electronics.

As for the inward versus outward bound M&As, the survey noted that traditionally, the value of inward M&As has been higher than outward M&As. However, in 2009 and 2010, the trend changed when the combined outward investment value was 100 per cent higher in terms of total announced deals in the public domain.

Difficult phases

The survey finds that the favoured fund-sourcing method is equity (at 20 per cent), followed by debt (at 5 per cent)· The principle focus of the evaluation process, for most companies, was EBITDA (46 per cent), followed by cash-flow (16 per cent) and revenue (15 per cent); the least emphasis was on gearing ratios (4 per cent). Gross margin, net assets and PAT were given equal importance at 7 per cent.

The most difficult phase of an M&A operation, according to the companies who took the survey, included structuring and negotiation (93 per cent), obtaining financials (87 per cent) and post-merger integration (86 per cent).

The easiest was to identify buyers/targets (46 per cent).

(This article was published on September 19, 2012)
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