‘Cos where promoter shareholding is less than 50% are ideal candidates for M&A'

Srividhya Sivakumar BL Research Bureau | Updated on September 10, 2011

Mr Shailendra Ghaste, MD, IDFC Capital.

In every adversity there is an opportunity. Since high debt levels with stringent interest rates are hurting local companies, there will be relatively more inclination and willingness to sell businesses... — Mr Shailendra Ghaste, MD, IDFC Capital.

An evolving regulatory framework and companies in search of technology and capital will drive greater activity in mergers and acquisitions by Indian companies says Mr Shailendra Ghaste, Managing Director, IDFC Capital, in an interview on M&A trends.

What are the key trends in M&A now?

M&A trends in India are evolving rapidly with changes in both domestic and international environments. Domestic companies are seeking opportunities abroad for access to technology, operational expertise, resources and a diversified customer base.

On the other hand, foreign strategic players are unable to ignore India as a market and are seeking opportunities for an entry into the Indian market. Further, large domestic projects require pre-qualifications and capital from foreign strategic players, which increases M&A activity. The evolving regulatory framework in certain sectors is also opening up M&A possibilities.

Foreign companies have been making more Indian acquisitions this year. What do you think is driving the trend?

Having an India presence is becoming imperative for foreign companies. Large global corporates continue to be bullish on India and are scouting for avenues to make an India entry.

Further, the scale and size of new projects in India is also on the rise, which requires extensive capital and pre-qualifications while bidding. Foreign capital, pre-qualifications and operational efficiencies are driving Indian companies towards foreign partners.

Indian companies are also attracting foreign strategic investors on account of their asset base, niche capabilities or sectoral presence.

Domestic deals have been somewhat moderate this year. How much of that would you attribute to high valuations?

The market environment in India has been quite volatile over the last few months. Indian promoters are adopting a ‘wait and watch' approach to strategic decisions such as M&A as they are hoping for markets to stabilise and fetch better valuations.

Further, the advent of foreign players is also impacting domestic M&A as companies see foreign strategic investors adding much more value to the business (international experience, pre-qualifications, operational efficiencies) as compared to domestic investors.

India Inc's experience with overseas deals has been mixed. How do you see that pan out? What are the key drivers and challenges you foresee?

Overseas investments need to be looked at with a longer time frame. The global market environment had its own ups and downs which has affected all businesses. The current state of affairs is not a correct reflection of how things could be in future.

Despite the current uncertainty across the globe, Indian corporates are continuing to seek deals in foreign markets and this trend is expected to continue. We have a handful cross border deals across various sectors. We think that continuing need for resources, superior technology/ product capabilities of foreign companies is likely to drive outbound deals. Access to capital, interest rates, market recovery, valuation expectation mismatch could be potential challenges.

How do you see the SEBI takeover code impacting M&A activity?

The revised SEBI takeover code is likely to have a positive impact on M&A activity. Since the minimum stake required for an open offer is increased to 26 per cent, it will facilitate strategic investors who are interested in acquiring 51 per cent stake in companies.

Further, companies where promoter shareholding is sub-50 per cent are ideal candidates for M&A, where strategic investors may potentially buy 25 per cent stake in companies (without triggering an open offer) and become the single largest shareholder.

How much of a deterrent would high interest rates be? Do you think we could see a repeat of 2008?

The situation currently is much worse than 2008. Interest rates are at higher levels than what was witnessed in 2008. Even the debt levels of corporates are significantly higher. As compared to 2008, where uncertainties were looming in few geographies, currently every relevant geography in the world is experiencing problems.

Having said that, in every adversity there is an opportunity. Since high debt levels with stringent interest rates are hurting local companies, there will be relatively more inclination and willingness to sell businesses, assets or partnering with strategic investors, who could potentially help in restructuring the current capital structures.

How different are the deal dynamics now than they were before the 2008 crisis?

There seems to be more pain in the system now than in 2008. As mentioned earlier, pain could lead to willingness of Indian companies to explore M&A opportunities.

Valuations across few sectors seem to be attractive, both in India and abroad. Debt restructuring will also lead to equity changing hands.

How do you see M&A activity pan out in the coming year?

There is likely to be both inbound and outbound deal flows. Domestic M&A will also pick-up as local markets stabilise.

Inbound M&A will be active on account of foreign investors wanting an India entry, large domestic projects requiring pre-qualifications and capital and an evolving regulatory framework opening up certain sectors.

Outbound M&A activity is also expected to increase as domestic companies will be looking at companies with: a) Access to resources/ raw material; b)Attractive valuations on account of global meltdown; c)Access to technology/ product capabilities; d) Diversified customer base; e) Operational expertise; and f) Pre-qualifications.

What are the sectors do you think would drive mergers and acquisitions in the next couple of years?

The following sectors would drive M&A in the next few years: a) Metals and mining: Outbound; b) Oil and gas: Inbound as well as outbound; c) Telecom: Likely consolidation with relaxation in M&A norms; d) Pharma and heathcare: More inbound than outbound; e) Financial services: Domestic and inbound, subject to regulatory changes; f) Technology: Inbound as well as outbound; and g) Retail: Inbound subject to regulatory changes.

Published on September 10, 2011

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