India Inc cuts back on foreign buyouts

Srividhya Sivakumar | Updated on December 19, 2011


Inbound mergers and buys jump threefold: Grant Thornton India

After actively seeking out foreign companies to acquire in 2010, Indian companies cut back on their acquisition spree in 2011 as high borrowing costs and dormant equity markets made buyouts difficult. Inbound deals, however, surged as a weak rupee and India's vibrant consumer market attracted overseas buyers. According to data released by Grant Thornton India, while inbound mergers and acquisitions (M&A) increased threefold, outbound deals activity halved in 2011. Indian companies announced M&A deals worth about $42.3 billion across 606 deals this year. While this does not top last year's record, it still is a healthy scorecard to end the year with.

Mr Topsy Mathews, Managing Director of M&A at Standard Chartered Bank explains: “International players who don't have a significant enough presence or operations here continue to find India attractive. India is a must-have market for them.” Global buyers will continue to come in, “driven by the need to capture the local market or establish a low-cost manufacturing or servicing base” says Mr Anjani Kumar, Head of Corporate Finance, RBS India.

Indian companies, in contrast, took a breather from overseas acquisitions, with high financing costs playing spoilsport. They made deals valued at $10.4 billion, half of last year's value. As Mr Sanjay Sakhuja, CEO of Corporate Finance at Ambit Corporate Finance explains, “On one side, equity markets are weak. This restricts the ability of Indian corporates to raise capital. On the other, there is a severe shortage of Euro Dollars.” “When you have a substantial amount of cash flows in rupees, and you are making acquisitions overseas, it becomes quite tough,” explains Mr Mathews.

So even as outbound deals may continue to get done, they will be fewer in number and will be driven purely by necessity. “A number of banks, including us, are sitting on a significant M&A pipeline. While many of these deals should have happened this year, they are on hold as companies want to wait for the financing to get cheaper and capital market to stabilise ,” says Mr Kumar. “A number of outbound deals are value-accretive in long term but not EPS-accretive in near term, and that's a concern in the current climate. Today you can not presume that shareholders will be supportive of a deal which may reward you in five years, but in the next two years will leverage the business and strain the financials.”

Resurgence from H2

While the first half of 2012 may be tepid, the second half could bring about a turnaround. “By March-April, we should see local inflation and interest rates coming down. You could see a turnaround in second quarter. And the moment that happens, the QIP market will open up,” says Mr Sakhuja, explaining why the second half of next year may be a more conducive environment to support M&A.

 “Once the secondary market turns around, the appetite for M&A will return,” says Mr Brijesh Kaushal, MD of Investment Banking at Daiwa Capital Markets.

Published on December 18, 2011

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