Mergers and acquisitions (M&A) in the country slumped to their worst since 2004 in the first half of 2009 as a liquidity crunch and mismatched valuations marred buying plans of Indian companies.

Analysts, however, say the worst may be over.

In the first six months of 2009, Indian companies were involved in 136 M&A deals, down nearly 54% from the same period last year, according to a study by Venture Intelligence, a research firm focused on private equity and M&A deals in India.

On value of announced deals, M&A activities fell 73% from a year ago to $5.4 billion (Rs26,136 crore). The average deal value dropped nearly 40% to $98 million.

In the second half of 2008, when the global slowdown started, the number of deals declined 28% but the average deal value has recovered from the $60 million seen then.

The biggest reason for the fall was the lack of liquidity, said Arun Natarajan, chief executive, Venture Intelligence.

This particularly affected cross-border deals as no leverage or buying finance was available. It was only companies with cash in hand that went hunting for targets.

Mismatch in valuations further dampened spirits as expectations of many promoters had not come down as much as the markets.

A few promoters were able to raise debt even as it was expensive. Therefore, instead of giving out stake on lower valuations, they raised debt, said Akil Hirani, managing partner of international corporate law firm Majmudar and Co.

Both Hirani and Natarajan expect M&A activity to pick up. We are already seeing an increase of 25% in terms of inquires. Volumes should go up in the next six months, said Hirani.

Natarajan sees M&A activity increasing in consumer-driven services and products and more inbound deals, or acquisitions of Indian companies by foreign firms.

The countrys biggest deals in the first half of 2009 were ONGC Videsh Ltds purchase of the UKs Imperial Energy Corp.

Plc. for $1.9 billion, Tech Mahindra Ltds $576 million acquisition of fraud-hit Satyam Computer Services Ltd in a global bid, and Sesa Goa Ltds $350 million takeover of Dempo Mining Corp. Pvt. Ltd.

At least 50% of the deals in the first half of 2009 were domestic acquisitions, against 40% last year, according to the Venture Intelligence study.

The most preferred destination for Indian acquirers was the US, with seven of the 31 outbound targets located in that country, followed by the UK with three deals.

The acquirers in eight of the 34 inbound deals were US-based companies, followed by French firms with five deals and German firms with four.

Information technology (IT), IT-enabled services (ITeS) and manufacturing industries accounted for the most acquisitions in the first half, with an 18% share each.

However, M&A activity in IT and ITeS had fallen from 27% in the first half of 2008, and manufacturing deals from 20%.