News: India story remains hot, Deal St will buzz despite entry of bears

(DNA 04/06/2006) Mumbai - As share valuations “correct”, will mergers and acquisitions (M&A) start losing lustre? This question is being asked on Deal Street because sellers, typically, tend to delay deals if they think they are not getting a good price for their shares at current market conditions.

The consensus among M&A mavens is that the action need not taper off, even though bullish spells tend to quicken the deal-making impulse. According to them, the M&A game is played on the basis of fundamental valuations, where earnings per share and future earnings take centrestage. And on that score, the dealmakers’ call continues to be to go long on India Inc.

Says Ajay Garg of Mape Advisory, which was ranked 11th among Indian M&A advisors by Bloomberg in 2005: “Conceptually, when there is high volatility in the stockmarkets, sellers may want to wait and see valuations improve before selling out,” he says.

But, as Garg is quick to point out, in a bull market, buyers could also do the delaying. “Conversely, we could also have a scene where, when prices are high, there are fewer buyers. But that’s not how it works,” adds Garg.

Udayan Bose, veteran investment banker and chairman of Thomas Cook in India, says Deal St is a paradox: “When stockmarkets throw up higher valuations, more M&As are consummated than under a bearish spell.”

Girish Vanvari, executive director, (M&A - tax), at KPMG India, believes that “corrected” stockmarket valuations could also spur more M&As. “Promoters,” he says, “will get realistic and will be more willing to part with their stakes in favour of acquirers, such as private equity investors, at more reasonable valuations.”

Private equity has been one busy cog in the M&A wheel. In the past couple of years, this segment has witnessed an incredible amount of activity. According to Sanjeev Krishnan, associate director, PricewaterhouseCoopers, which was ranked No 8 M&A advisor by Bloomberg last year, “private equity has become very expensive. Look at the Prime Focus and Deccan Aviation public issues. These are not private equity deals, but they make the point. The companies had to lower the price band and extend the subscription period.” Krishnan believes there could be a “correction” in the private equity pricing math from here onwards.

Currently, a significant portion of M&A activity remains outbound - where Indian companies acquire firms abroad. In inbound M&As, financial services, information technology and media remain in the strobe lights.

In fact, there is an expectation of consolidation in the domestic information technology space.

Vishesh Chandiok, international practice partner, Grant Thornton, who tracks M&A deals, says this will kick off with larger Indian technology firms gobbling up smaller ones. He believes there is also a slew of deals waiting to be struck in the auto components sector, where European companies are taking on domestic firms for acquisition of assets.

Chandiok says the pace of M&A activity will pick up strongly.

The current fiscal could also see a few Indo-Chinese M&A deals being consummated. “This is an area where we have seen very few deals and is at a nascent stage,” says Chandiok.

PwC’s Krishnan, however, is not as bullish. He points to a rather quiet Deal St these days. “If you exclude outbound M&As and private equity, there isn’t much happening. Domestic consolidation is far and few between, unlike last year, when we saw the last round of telecom sector consolidation.”

Why? “The opportunity is when the economy is on an upswing - when everyone is trying to expand. We had a situation some years back when “core business” was the mantra and companies started divesting their non-core businesses. Now the boot is on the other foot. Business houses are back in diversification mode. Both, by way of M&As and organic expansion.”

Krishnan believes more joint ventures will be taken over by foreign partners. “The 26% and 49% guys” will exercise their purchase options or negotiate deals for picking up a higher stake because the Indian story is rock solid. This will happen notwithstanding the swings on the bourses.