Kai Taraporevala
Sridar Swamy

LAST year, 2005, was a record year for Indian corporate finance activity. It saw the largest number and value of deals take place since the time INDATA began tracking corporate finance activity. The upward trend in the first half of the year picked up pace dramatically in the second half. A total of 325 deals valued at Rs 47,480 crore ($10.5 billion) was recorded between June and December 2005. The total deal value for the second half has shown a growth of 83 per cent over the first half and a phenomenal 286 per cent over the same period in 2004. The year 2005 ended with a tally of 625 deals valued at Rs 73,400 crore ($16.3 billion).

The average deal value was at Rs 117.4 crore ($26.1 million) in 2005 compared to Rs 86.4 crore ($19.2 million) in 2004, a growth of 36 per cent.

In 2005, the strategic investors ruled M&A activity. These investments account for 87 per cent of the total deal value for the year. While private equity does not have a large share in the total deal value for the year, the absolute numbers have also grown since 2004. In 2004, there were private equity deals worth Rs 7,680 crore ($1.7 billion) that grew to Rs 9,290 crore ($2.1 billion) in 2005, up 21 per cent.

The telecom sector is back in the reckoning this year with consolidation in full swing. The top three deals of the year, accounting for 20 per cent of total deal value, were all from the telecom sector. This sector has seen restructuring, consolidation and strategic investments all happen this year.

Sectors, players, key deals

Telecom emerged as the leading sector for M&A activity in 2005 with 15 deals totalling Rs 2,540 crore ($5.7 billion) and made up 34 per cent of the total deal value. The other major sectors were financial services (15 per cent), IT (11 per cent), and cement (5 per cent).


(15 deals totalling Rs 25,430 crore, $5.7 billion)

The telecom sector also emerged as the leading contributor to INDATA in 2005. The relaxation of the foreign equity norms by the Government from 49 per cent to 74 per cent led to this final round of consolidation in the telecom sector.

The largest telecom deal recorded was the 10 per cent effective stake (5.6 per cent stake bought directly and a further 4.4 per cent stake through a stake in Bharti Enterprises, the holding company) acquired by Vodafone in Bharti Televentures for Rs 6,700 crore ($1.5 billion). Bharti Televentures is India's leading telecom services provider with a pan-India presence and a subscriber base of over 17 million.

The Hutchison group was also active in the M&A space in 2005. Its long desire to be an all-India GSM player might finally come true. In the first half of 2005, Hutchison merged all its businesses in various telecom circles into one entity Hutchison Essar. In the second half of 2005, Hutchison Essar acquired the GSM mobile business of BPL Communications for an equity value of Rs 3,480 crore.

This was after the aborted attempt last year by Hutchison to acquire Aircel. The BPL acquisition adds the Tamil Nadu, Maharashtra and Kerala markets and also gives Hutch a stronger leadership position in Mumbai (where it already operates). Hutchison Essar has also acquired Essar Spacetel which has the licence to operate in seven additional circles. In all, this gives Hutch 23 circles to operate in and also puts it on a par with Bharti Televentures in terms of geographical reach.

The GSM telecom space has also got a new competitor, Maxis Communications Berhad of Malaysia, which has, in partnership with the Reddy family of the Apollo group, taken over the mobile business of Aircel for Rs 4,860 crore ($1.1 billion). This give Maxis a presence in Tamil Nadu, Chennai and five others States. The operations will expand to 12 States as Aircel already holds the required licences.

Idea Cellular finally saw the exit of Cingular Wireless from the company this year with the Aditya Birla group and the Tata group acquiring its stake in the company for Rs 1,300 crore ($289 million). With these deals, the telecom sector in India has consolidated with five players having an almost all-India reach Bharti Televentures, Hutchison Essar, BSNL, Reliance and Idea.


(93 deals totalling Rs 11,430 crore, $2.5 billion)

The finance sector was also a significant contributor to takeover deals in 2005, with a 15 per cent share of total deal value, as against 5 per cent last year.

The biggest deal announced in the second half was the takeover of DSP Merrill Lynch by Merrill Lynch for Rs 2,360 crore ($524 million). Merrill Lynch has acquired 47.8 per cent stake from its partner, Hemendra Kothari and, now, the company is to be delisted from the stock exchanges by buying out the 2.3 per cent public shareholders. Hemendra Kothari will retain 10 per cent stake in the company.

After a long process, the Government has finally sold its stake in the UTI Asset Management Company to the four state-owned financial entities for Rs 1,240 crore ($275 million), which were the original sponsors of the mutual fund. These are Life Insurance Corporation of India, State Bank of India, Bank of Baroda and Punjab National Bank. Each of them will have an equal stake in the asset management company. The mutual fund has assets under management of Rs 25,000 crore and is the largest in India.

In the insurance sector, Reliance Life Insurance Company (Anil Ambani group) bought the AMP Sanmar Life Insurance Company from the Sanmar Group and AMP of Australia for Rs 400 crore ($89 million). This acquisition will allow Reliance Life Insurance to get into business fast as the licence to operate in life insurance it had obtained earlier had lapsed. AMP Sanmar has a distribution presence in 80 cities in India.

Information technology

(93 deals totalling Rs 7,750 crore, $1.7 billion)

The IT sector has remained a steady source of M&A activity. In 2004, there weredeals worth Rs 7,400 crore ($1.6 billion) in the IT sector. This year, the number of deals has almost doubled, from 48 last year.

The largest deal in the information technology sector was the acquisition of i-Flex Solutions by Oracle Corporation from Citigroup. Citigroup sold its 41.36 per cent stake in i-Flex to Oracle Corporation for Rs 2,580 crore ($573 million). A compulsory open offer was also announced for the shareholders, worth Rs 1,380 crore ($305.7 million). i-Flex is a leading software services provider to the international and banking industry, servicing 575 banks in 115 countries. This acquisition gives Oracle access to best-selling banking software products and will allow it to compete better with SAP and other competitors.

After the acquisition of Hughes Software Systems in 2004, Flextronics has this year announced the offer to buy out the minority shareholders in the company, now renamed Flextronics Software Systems. This acquisition will cost Flextronics Rs 470 crore ($103.5 million) and give it complete control over the business.

Infinity Capital Ventures bought out the 31.6 per cent stake held by Satyam Computer Services in Sify, the Nasdaq-listed Internet business for Rs 280 crore ($62.6 million). Satyam sold its stake in order to remain a pure IT services and solution company.

Looking ahead

With a number of private equity players having announced plans of significant investments in India, the outlook for M&A activity looks bright in the coming year. Blackstone Group, Carlyle and others have all announced plans to invest in India. This activity should pick up in 2006. As the economy is doing well and companies are seeing sustained growth, the next round of M&A activity could possibly be the mid-sized companies starting to acquire in order to reach scale in operations.

Financial services, pharmaceutical and some manufacturing sectors such as auto components are likely to see continued high levels of M&A activity with international interest in India as an outsourcing base as well as growth in the domestic market. If the Government alters regulations on ownership of banks, this sector could see some big deals.

Private equity

While 2004 saw the highest private equity investments in three years, 2005 surpassed that by a huge margin. There were 169 private equity deals worth $2 billion announced in the full year.

Financial services, pharmaceuticals and information technology, textiles and telecom are finding favour with private equity investors. Another feature of the private equity market is that the great majority 58 per cent of private equity investments in 2005 were into listed companies.

A significant transaction in the second half was the purchase of a 13.45 per cent stake in Centurion Bank of Punjab (formed by the merger of Centurion Bank and Bank of Punjab this year) for Rs 380 crore ($85 million) by GW Capital, Chrys Capital III & Citigroup Venture Capital. There was also the investment of Rs 130 crore by General Atlantic European Investments in New Delhi Television, a TV broadcasting company. The average deal value, although up from Rs 38.4 crore ($8.5 million) in the first half to Rs 73.8 crore ($16.4 million) in the second half, remains small by global standards.

Overseas deals

While the survey tracks corporate finance activity involving Indian targets, the volume of overseas acquisitions by Indian companies is also growing significantly. A number of business groups are realising the advantages of expanding their operations overseas.

The year 2005 saw 100 such transactions worth $2.4 billion, a growth of 39 per cent over the previous year. While two of the largest deals happened in the first half, the $290 million acquisition by Videocon of Thomson's colour picture tube business and the $263-million acquisition by Matrix Laboratories of DocPharma of Belgium, the second half was by no means dormant. The Tata group was aggressive with overseas acquisitions throughout the year. Various companies of the group announced 10 deals worth $653 million. The largest deal announced was the $178-million acquisition of Teleglobe International Holdings by Videsh Sanchar Nigam Ltd, India's largest international telephony and Internet service provider.

Apart from IT companies that have been active acquirers in the past, now, there are firms in a number of other sectors, such as pharmaceuticals, auto components and textiles, also looking at overseas markets.

In addition to the corporate finance activity, there was also the acquisition of oil assets in Syria by Oil and Natural Gas Corporation of India in joint venture with China National Petroleum Corporation worth $576 million.

(The authors are with India Advisory Partners, an independent group that advises international companies doing business in India and Indian companies investing abroad. )

(This article was published in the Business Line print edition dated February 1, 2006)
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