After a lull of activities, we are witnessing a comeback in M&A volumes in the Indian market. Earlier around 2007, Indian corporates were oozing with business confidence and the valuations were touching new highs. Armed with this confidence, Indians were out shopping for assets giving them either technological advantage and/or access to newer markets. We were considered the most credible buyers of assets globally. As a result of these factors, cross border transactions dominated the M&A discussions. However, the situation today has changed significantly with corporates focusing on balance sheet repair, the cross border transactions are not ruling the charts anymore. With continuing global uncertainty, domestic consolidation and inbound financial sponsors led M&A are the new M&A theme.
In this article, I have identified 5 trends in M&A which will lead to another supercycle in M&A activity. We are witnessing few of these trends taking shape already.
Trend 1- Evolution of distress asset market
There is staggering Rs. 10 lakh crore of borrowings being estimated to be under financial stress. The solution lies in first realizing the fact that the value of these assets is lower than the debt in the balance sheet. The stakeholders need to acknowledge this fact only then appropriate remedial measures can be undertaken.
It is one of the biggest crises faced by India and Government is willing to take bold steps in resolving the issue of the burgeoning poor performing assets. The assets need operational and financial turnaround and in some cases change in management. This provides an opportunity to various class of investors such as special situation, vulture funds and distress funds to set up shops in India and participate in turnarounds. The performance of many such assets could be enhanced through simple solutions like infusion of working capital, change in management focus, while some may need Government intervention.
We are already witnessing proliferation of ARCs which are looking to unlock value from such assets. In addition, SEBI is set to ease rules of acquisition to make it more attractive for investors to buy distressed companies from banks aiding the Government and RBI’s resolve to reduce the bad loan burden on the Banks. The regulator has been granting exemptions to banks acquiring the stock of listed distressed companies. This includes relaxing the pricing formula for making an open offer to public shareholders and lock-in requirement.
While the regulator will play a key role in the transformation, the attitudinal change amongst the banks and management will also provide a significant push. Eventually, the alternate asset funds will be a viable class actively playing the game of acquiring these assets, turning them around and selling them. Given the current size of the problem, the M&A potential is enormous.
Trend 2- India offering best returns to financial investors
The geo-political uncertainty globally, has turned out beneficial for the Indian market. Back home, there is tremendous exuberance and increased inflows leading to the current unexpectedly long bull run in the equity markets. Rupee has already appreciated with foreign inflows. The inflows constitute both from portfolio investors and private equity funds. While portfolio money flow can easily reverse its trend, Private equity inflows are here for the longer haul.
At $14 bn, total deal value in India in 2016 was the second highest in the past nine years. The M&A data suggests that private equity deals have gone up by 17% in just 4 years. There has already been $5.4 bn investment made this year till April and this trend is likely to continue. PE led M&A deal in China is dominant at $223 bn in 2016 which has increased from only $34 bn in 2013, but India still getting only a driblet.
Encouragingly, most international PE fund heads have admitted that they will be looking to deploy funds in India over the next few years. This coupled with increase in dry powder with India focused funds can lead to a fairly sanguine outlook for the Indian PE industry.
Private equity investors are playing active role in the board room and are involved in strategic discussions. Some had burnt their finger due to governance issues in the past having learnt from those experiences, they are likely to play more active role in decision making giving them confidence to take higher exposure. This has resulted in rise in number of private equity owned assets. As most funds have life of 5-7 years, these assets are expected to constantly exchange hands.
Trend 3- Startups challenging status quo
How long a successful startup remains dominant or even significant, depends on the ability of the startup to continue to fund and remain a disruptor. It’s not always easy for a company to keep pace with the rapidly changing consumer trends and the dynamic technological progression happening worldwide.
This space of startups will see the most amount of M&A activity in the coming future. With a change in market dynamics, easy availability of pre-series A and Series A funding has dried up. This will lead to companies in early growth stage with to seek buyers, in order to sustain the businesses.
Larger players are constantly on the prowl for buying out companies which either improve focus on their existing businesses or help them enter new innovative segments. Partnerships are needed to optimize, consolidate and/or become fierce competitors. As an instance, in the fashion and apparels ecommerce, Flipkart has acquired competing startups to ensure market leadership.
Ashish Adukia, President and Head, Group Corporate Finance, Aditya Birla Group writes this piece for the July 2017 edition of our Financial Foresights.
