Monday, August 27, 2012

Indian M&As are growing very rapidly in volume

Indian M&As are growing very rapidly in volume and value this year, but valuations of 2007 aren’t expected so soon. Neither are the big ticket deals. In retrospect though, that may actually be a good thing. By Virat Bahri & Gyanendra Kashyap

In the banking sector too, there are expectations of heightened M&A activity in the run up to norms being eased for setting up new banks in the sector. Hinduja group acquired the private banking arm of KBC for €1.35 billion to acquire best in class banking practices in May, and the domestic market is seeing lot of action as well. ICICI recently entered into a merger agreement with the Bank of Rajasthan (BoR) for its branches and customer reach in north and north west India. The swap ratio was fixed at 25 shares of ICICI for every 118 shares of BoR. As new players enter, a shake out is expected in the banking sector as some of the smaller players find it difficult to survive. Already larger ones like HDFC, Kotak Mahindra and IndusInd are actively looking for targets. In the context of universal banking services, the game will be majorly skewed towards players that have greater market share. In fact the government even had discussions with some public sector banks last year, asking them to actively explore M&A opportunities.

On the pharma side, Indian companies find themselves on the other side of the equation with players like Ranbaxy, Piramal Healthcare, Dabur Pharma, Shantha Biotech and Matrix. Indian players are growingly finding it difficult to compete with their largely generics portfolio, which have elicited concerns from the government on the possibility of price increases of essential Indian drugs. Big Pharma is looking for a greater generics play on the other end, as patented drugs reach expiries. Meanwhile, an increasing aggression in the healthcare space is visible with Fortis fighting hard to take control of Parkway Holdings, where it already has a 25.7% shareholding and faces a counter bid from Khazanah. Even IT faces a similar situation to pharma with respect to small and medium sized players, and rumours of a proposed buyout of the promoter stake in Patni Computers by NTT seem to affirm an underlying trend. With increasing competition from other low cost destinations and global IT majors opening delivery centres in India, a number of small and mid-size IT companies will have to redefine their growth model fairly quickly, else they could face the consolidation pill too.

Another sector that definitely merits a mention is the FMCG space, where Indian companies have beein doing a number of acquisitions. The broad rationale is to extend their reach into similar markets, gain new customers and expand in scale. Godrej, which acquired Sara Lee’s stake in India for Rs.11 billion, is the clear leader in this drive. Besides, Godrej Consumer Products Ltd. recently acquired Indonesian insecticide firm Megasari Makmur Group for Rs.12 billion personal care products company Tura in Nigeria for Rs.4 billion and Latin American hair colour company Issue Group for Rs.2.5 billion, which was closely followed by the acquisition of another Latin American hair colour company Argencos. Adi Godrej calls it the 3/3 strategy for growth – three categories - soap, household insecticide and hair colours for three continents - Asia, Africa and Latin America. Recently, Dabur India acquired Turkish personal care company Hobi Kozmetik for around Rs.20 billion in its first overseas acquisition.

The Indian M&A story goes far beyond though, as a large number of small deals that happen need to be analysed to comprehend the story in its entirety. On a sectoral basis, information technology, consumer discretionary and industrial sector led the rest in H1, 2010 (VCCircle) in terms of volumes. Avinash gives a general view on the broad rationale used by Indian firms at a micro level, “Indian companies are primarily looking to buy outside for technology, they are looking to buy outside for brand name, they are looking to buy outside for some of the softer things like customer base, distribution network, things that they do not have currently in India.” For instance, Deloitte advised Hindustan Dorr Oliver when they acquired DavyMarkhum this year. DavyMarkhum helps them get into the heavy fabrication side of the business. A number of such fits can be seen as per the opportunity. For instance, the downturn has left many auto component firms in US and Germany in difficult times. They automatically provide an opportunity for Indian auto component firms to fill in gaps in their strategy.

One question that comes up in the context of these M&As is the size factor. Indeed, the leverage levels are low and we may not get those big ticket deals too soon. But that shouldn’t worry us much, since size is certainly not the ultimate criteria to look at for M&A. Yes, Indian companies may seem mildly aggressive as compared to global players and even compared to Chinese counterparts, but to an extent, caution is highly justified in M&A deals. They do need to step up the pace, but not necessarily look to outcompete the global giants. Instead it is better to look at their own capabilities and potential before taking the plunge.


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