The last couple of years have seen heightened activity in the mergers and acquisitions space involving Indian firms. Low-cost operating environments in India and strong balance sheets with potential for leveraging, make Indian firms ideal acquirers even in international markets. With the recent high profile M&A deals like Tata Steel's $8 billion acquisition of the Anglo-Dutch firm Corus, Vodafone's purchase of India's second biggest privately-owned mobile phone service provider Hutchinson-Essar and many others in the making, the new buzzword for India Inc. seems to be Mergers and Acquisitions(M&A).
There have been a number of studies that throw light on the growth in activity and the dominant sectors. However, the need of the hour is to understand the challenges, drivers, capabilities of players and the consequences of this fast growing phenomenon. In 2007, A T Kearney & Knowledge @Wharton joined hands to conduct a study of the M&As involving Indian firms. This series is based largely on the findings of that study.
INDIA INC. ON DEAL STREET
"Opportunities multiply as they are seized" says the Chinese General and military strategist, Sun Tzu and he could not have been more accurate in the context of the current status of M&As in the Indian market. In the past few years, leading Indian companies have made enormous strides in acquiring businesses abroad, signalling a new level of participation in the global space. There is no doubt that India Inc. has arrived and is attracting attention the world over. India's economic growth with a rapidly increasing middle class and a large English-speaking work force has made it an unbeatable destination for foreign investors.
M&As have seen tremendous growth in the last four years both in terms of value of deals and volume resulting in a 47% CAGR (compounded annual growth rate) in terms of volume - among the highest growth world-wide . The year 2007 saw the total number of deals rise to 1000 (M&A and private equity (PE) put together) compared to 782 in 2006 and 467 in 2005.
The number of multi-billion dollar M&A deals has risen to seven in 2007 from none in 2006. Five of the seven deals were in the infrastructure and power/energy sectors, which is not surprising because of the sheer size of the projects.
Infrastructure is the weakest link in India's growth story and development in this sector will continue to be buoyant. Also reflective of a maturing M&A market is the significant rise in value - 51% CAGR over the last four years, indicating the increased use of the inorganic route to fuel growth.
The value of cross border deals has almost tripled from 2006 to $47 billion with inbound deals at $15 billion and outbound deals at $32 billion. The Tata-Corus, Vodafone-Hutch and Hindalco-Novelis deals accounted for 56% of the total M&A deals during 2007. Although the value of domestic deals has actually declined from $4.9 billion in 2006 to $2.85 billion in 2007, the number of deal sizes has significantly increased which indicates that M&A is becoming an effective tool even for small to mid-sized companies.