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Pacific financial sector cautiously optimistic towards M&A : PwC
April, 30th 2009

The macro economic conditions in India are turning favourable with low inflation and improved liquidity.

India can be one of the first economies in Asia to come out of the economic crisis in the midst of slowing economic activities, says PricewaterhouseCoopers (PwC) on the basis of a report, prepared by it, titled, A New Playing Field: The Outlook for M&A in Asia

According to the report, 73% of the respondents in India believe that the economic slowdown and credit crisis in India will not persist for more than a year. Substantiating the view, Bimal Tanna, India leader for PwC private equity practice said, "this optimism in the Indian executives arises from the fact that the demand in India is largely led by the domestic economy and Indias dependence on exports is comparatively lower."

It is also expected that there will be a continued impetus given to infrastructure spending by the Indian Governments. He added that the macro economic conditions in India are turning favourable as with inflation level in India being low, liquidity position is improving due to loosening of monetary policy.

Interest rates are presently low and are expected to remain low, says Tanna.

Indian Financial Services Unharmed From Global Crisis

The survey also points out that the Indian financial services sector escaped relatively unharmed from the global economic crisis owing to regulatory models in force in India and the conservative management and approach to risk adopted by the Indian companies. Besides this, the Indian companies were less exposed to complex products and were focused on traditional businesses, which also saved them from adverse affects of the economic turmoil.

Availability of funds, pricing of risk, consolidation in the banking sector, quality of credit, shift away from leverage and shift in economic power from west to east will be some of the major factors driving change in the financial service industry in the near term, said the report.

Cautious Optimism In Asia-pacific M&A

The report suggests that the current economic environment provides various opportunities for M&A activities and expansion. According to the report, a large number of Indian executives believe that the slowdown will provide them with an opportunity to increase investment in the existing businesses and to enter into new markets. says that the slowdown is an ideal time to form joint ventures and to make acquisitions.

The report, however, reveals that a majority of respondents said that they did not anticipate an acquisition by their company in the coming year. Tanna says, Deal making scenario in India, as in the other countries, is moving slowly and is largely impacted by similar issues such as limited availability of capital, concerns regarding present performance and uncertainty regarding future prospects. He also cites the gap between private and public valuations as a factor impacting the M&A in India.

What differentiates the deal making scenario in India from that of the rest of the world is that a large number of India companies are owned and managed by promoter families and their personal preferences have an important bearing on the acquisition and divestment decision, says Tanna.

Valuations To Bottom Out Further

Amid all the talk about the valuations being low and this being the right time to acquire businesses, the report presents an opposing view. The report says that only 22% of the respondents believed that prices of assets in India are currently attractive. Most firms are still sticking to the wait and watch approach as a majority of the respondents, in the survey, believed that the prices would become more attractive within a year.

Considering the current economic situation, most companies would prefer playing safe and would hence look at acquiring only performing businesses, revealed the report. The report says that only 22% of the respondents in India anticipate acquiring a distressed business as against a performing business.

Distressed assets, as an investment class, carry low priority in such times as performing assets are available at low valuations and become more attractive vis--vis distressed assets on risk return hypothesis," added Tanna.

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