The domestic merger and acquisition (M&A) space is seeing significant increase in activity, particularly since the last 6-8 months. This is despite the rise in valuations following about 50% rise in the stock markets during the last one year.
M&A deals touched $24.8 billion in the second quarter of 2010 taking the total value in the first half to $48.1 billion, up from $16.3 billion clocked in the whole of 2009. Domestic deals increased to $14 billion in the same period this fiscal from $1.7 billion in Q2 of 2009 to while the number of outbound deals trebled to 66 in the second quarter of 2010 from 22 in the comparable period of 2009, according to the data compiled by VCCEdge, research arm of news portal VCCircle.
The most targeted sectors were telecommunication services, healthcare and financial services.
But why is the corporate world in a hurry to pursue M&A transactions and are the valuations right?
Investment bankers feel that increase in M&A is because Indian companies have demonstrated their ability to come out unscathed from the worst patch of the economic downturn during 2008-09.
Avinash Kalia, associate director, PricewaterhouseCoopers, said that companies have realised their inherent capability to survive in the toughest business environment so far and remain financially sound.
“They are very much in control of their finances now and are able to raise funds through various options. There is no uncertainty and the managements are more confident of the direction their companies are headed and hence are now aggressively looking out of good quality assets in the domestic and international markets,” he said.
Efforts are being made by corporates to identify growth drivers and a good percentage of it is expected to come from the inorganic option.
JP Morgan research analysts Bharat Iyer, Bijay Kumar and Gunjan Prithyani in their recent report said that M&A announcements have gathered momentum, particularly for mid- to large-sized deals.
“The trend is reflective of improving corporate confidence, stabilising valuations and improved access to capital,” said the analysts.
They said though there were sellers in the market, deals were not being struck earlier because the valuations weren’t attractive, another analyst said. There was a huge gap in the price expected by the seller and what a potential buyer was willing to pay, he said.
“But revival in the stock market has improved the valuations of companies wanting to sell. Valuations offered for various deals in the last couple of quarters have been at a fair value. Most importantly, there is meeting of minds between the buyer and the seller,” an investment banker said.
However, deals such as Inox-Fame, GMR-EID Parry and the recent SpiceJet transactions were done at a discount, the banker said.
Going forward, financial sector (large private banks buying small regional banks), telecom, cement and healthcare sectors are expected to lead in terms of local M&A activity. “Multinationals will likely drive acquisitions in the case of cement and healthcare assets. We expect more outbound M&A activities in the case of the energy sector (including coal),” the JP Morgan analysts said.
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