After a relatively dull 2016, the mergers and acquisitions (M&A) space is headed for some action this year. Last year had a slow start, but October witnessed big-ticket deals with transactions worth $4.5 billion, taking the January-October deal tally to $32.55 billion. The momentum achieved in October still continues, giving analysts the confidence to forecast an action-packed year ahead.

Mergers and acquisitions are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or combined. As an aspect of strategic management, M&A can allow enterprises to grow, shrink or change the nature of their business or competitive position.

The number of deals in 2016
reflects a definite spike in private equity-backed M&As, says Nishesh Dalal, co-head (transaction services), deal advisory at KPMG India. But, lack of clarity on tax reforms and foreign direct investment (FDI) norms continue to challenge deal activity, Dalal adds. According to him, large companies are playing the wait-n-watch game and are treading cautiously. “If there is some clarity on some of these reforms including the goods and services tax, foreign direct investment and sops for digital transactions in the upcoming Budget, it is likely to push the M&A activity further and we expect the deal numbers to be much more than last year.”

According to a Mergermarket M&A trend report, India is becoming an increasingly influential M&A market with its M&A activity reaching $64.5 billion in 2016, comprising 8.8 per cent of the overall Asia-Pacific deals and the highest since 2007. M&A deals involving Indian companies increased to 82 per cent in the first half of 2016 and online business led this trend.

Further, the sudden announcement on demonetisation in November had a knee-jerk effect on deal activity. While economic activity slowed down due to the lack of anticipated reforms taking concrete shape, the announcement forced companies to realign their business strategy further fuelling deal activity, Dalal added. Energy, mining & utilities replaced financial services as the most active sector in 2016 with deals totalling $17.1 billion ­— almost three times that of the year before. This was largely fuelled by Essar Group selling a combined 98 per cent stake in Essar Oil to both Rosneft and Trafigura for a combined value of $12.7 billion. Another big-ticket deals in October was the merger of Makemytrip and Ibibo, which is estimated at $1.8 billion.

According to Dalal, acquisition of technology assets is a strategic move in M&A as it can prove to be more effective than outsourcing when a company plans to make technology a critical part of its business model. Technology accounted for only 56 deals last year, down from 89 in 2015. This was the largest decline in deal count across all sectors.

Following a dip in activity in the technology sector last year, 2017 has the potential to improve. Experts, however, say that the year is unlikely to touch the heights of 2015 as investors wait for further easing towards more realistic multiples and valuations.
“More companies say they have increased cash levels and intend to use their cash to strike more deals,” says a study by Deloitte. Seventy-five 75 per cent of all respondents expect the deal activity to increase, while 64 per cent of corporate survey respondents expect deal size to rise, indicating an uptick in transactions.