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Suresh Krishnamurthy

Within a week, there were talks of M&A activity in as many as five sectors of the economy. If the talk materialises into deals, they could act as a catalyst to galvanise stock prices.

WHILE the merger and acquisitions scene is not exactly sizzling, the temperature is certainly on the rise. Amid the gloom created by rising inflation and soaring global oil prices, the news about possible mergers is certainly heart-warming.

If stock prices are to be dragged up from the morass they are in now, and that too quickly, increased M&A activity could be the tool. Hopefully, some of the talk will translate into action and pep up the sagging market.

Merger talk: It started with the Finance Minister, Mr P. Chidambaram's statement that he is exploring the issue of public sector bank mergers. He has also stated that consolidation will be good for the industry. This was followed by the Petroleum Ministry statement that merger of oil firms is being explored.

On Friday, the Bharti Telecom CEO, Mr Sunil Mittal, said that big mergers in the telecom space are likely, while ITC announced the consolidation of its hotel arms with itself. In July, IDBI agreed to merge with IDBI Bank, Oriental Bank of Commerce acquiredGlobal Trust Bank and BPL unveiled a joint venture with Sanyo of Japan.

The unusually high level of merger talk comes after M&A activity has cooled down considerably since the second half of 2002. The moribund economic activity and depressed stock prices acted as a catalyst for M&A deals then.

The value of M&A activity rose above Rs 25,000 crore then, according to data published by India Advisory Partners, London. Thereafter, as economic activity improved and stock prices surged, consolidation slowed down.

In the first half of 2003, second half of 2003 and in the first half of 2004, total deal values were much less than Rs 15,000 crore.

In addition, IT and telecom segments, according to India Advisory Partners, accounted for a substantial proportion of the activity. The acquisition activity in the mainstream manufacturing economy has, by and large, remained unimpressive.

Need for consolidation: In this context, the merger proposals outlined last week are welcome. They may even be crucial for a number of reasons. One, disinvestment is now practically on the backburner.

If restructuring and value unlocking needs to happen in the public sector, which accounts for a major proportion of the assets of India's economic sector, mergers are an important answer now, in the absence of disinvestment.

Second, capacity utilisation in a number of industries is still low, particularly in segments such as consumer durables, paints, textiles, petrochemicals, ancillaries to power, steel and automobiles.

Secondary producers in metals also suffer from low capacity utilisation. M&A activity can as such bring down the number of producers and consolidate capacities. This would pave the way for a fresh round of investment activity.

Competitive economy: Consolidation will also help Indian producers face competition. Free trade agreements that affect auto and auto ancillaries, a freer WTO regime for healthcare and textiles and the threat of rising metal imports suggest that the competitiveness of Indian firms needs to improve.

Studies indicate that large firms are indeed globally competitive. Their productivity and profitability are now comparable to global firms. Smaller Indian firms may, however, need to consolidate.

Consolidation in the banking industry is even more crucial. One of the banes of public sector banking in India is the unusually high level of intermediation costs. These have come down in the past three years as profitability and volume of activity improved dramatically.

Going forward, however, consolidation is a very important component of the drive toward lowering of operating costs. Lower operating costs may lead to a competitive interest rate scenario favouring Indian firms. In addition, larger banks will be more amenable to taking risks and this can facilitate investment activity.

Finally, merger activity of a higher order has been conspicuously absent in the manufacturing sector. Despite fragmented and uneconomic capacities, consolidation has happened only through failure of firms rather than through mergers. A competitive economy augurs well for a boom in stock prices.

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