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`There's a premium that foreign companies need to pay for their India footprint'
September, 07th 2006
Mr Rohit Kapur is an Executive Director at KPMG India Private Ltd. He has over 15 years experience in mergers and acquisitions (M&A) advisory work. He was most recently based in New York where he worked for several institutions, including PaineWebber Inc., Calyon Securities and KPMG Corporate Finance. Mr Kapur has wide experience transacting deals in the Americas, Europe and Asia across an array of industries. He takes a few questions from Business Line on M&A. How would you best describe the current M&A scene? Is it different from the M&A activity last year, and if yes, how? The current M&A scene can be described in one word `robust'. The M&A business is known to be cyclical and what we are seeing is a crescendo of positive sentiment towards transactions in a wide array of industries, with both inbound and outbound interest. If there is a difference in M&A activity from last year, it is in terms of the size of transactions that are being contemplated. While in the past Indian companies toyed with the idea of picking up specific product lines in complementary businesses overseas with the philosophy that dipping one's toes in foreign waters was a judicious approach, there is now a more aggressive tone to expansionary plans and the transactions being contemplated are of a much larger scale. This is because of the heightened confidence that corporates have on the capabilities of Indian managers to deliver world-class results in new markets. It also helps that the financing markets are more receptive to assisting India Inc. accomplish its global agenda by making more attractive financing available for transactions. What factors have contributed to KPMG's dramatic climb in the league table rankings? The climb in the league rankings is reflective of the disciplined approach that the firm has undertaken to assist its clients in meeting their strategic objectives and focusing on key sectors. We have worked and continue to work with India's leading business houses on cross-border transactions, fund raising and consolidation opportunities. Globally we are leaders in mid market transaction advisory which is the sweet spot for deals emanating from India. Are Indian companies overpaying for foreign acquisitions. And is the vice-versa true for Indian targets? The answer to this question is only going to be borne out in the future as the contemplated business rationale for these transactions will need to be executed. In our opinion, Indian companies are making a concerted effort to become global players and are bringing to the table compelling business models and potential synergies, which together with healthy performance at home and access to competitive financing make them serious buyers for acquiring targets overseas. On the other side, India has catapulted onto the world stage in a very compelling manner and there is a premium that foreign companies need to pay for their India footprint. Do you think we need changes to laws to make them more M&A friendly? If yes, what specific changes? The regulatory environment has evolved significantly over the past decade to encourage M&A. While more financing is available for acquisitions, leveraged buyout (LBO) transactions are still constrained by targeted gearing by banks and bank's traditional requirements for security such as asset cover as against future cash flows. LBOs are expected to emerge in Indian transactions. The relaxation of FDI guidelines has helped trigger M&A inbound activity. Further, the recent guidelines on FDI in real estate have paved the way for new development-related financing. However, permitting investment in secondary transactions may help Indian business groups monetise existing developed assets which are non-core to their business. In the banking, finance and insurance sectors, in our experience, regulatory approvals take extended periods of time which sometimes impact the success of the transaction. When valuing a company what are the top five measures that you would consider? Each situation is specific and there are no general rules that apply. We do tend to value a target on a standalone basis on accepted valuation techniques that include multiples of similar publicly traded companies, precedent transactions in the industry to the extent they were consummated in similar circumstances and assessing the cash flow generating power of the target on a risk-adjusted basis. In addition, we also take into account situation-specific factors such as the competitive dynamics surrounding the process vis--vis interlopers, scarcity value of the asset and potential synergies that can be realised by a combination. What can be a good average of success for M&A deals? How many can we expect to live happily ever after? According to several global surveys, including KPMGs post-deal surveys, more than half the deals consummated globally do not create shareholder value, although this trend is improving. Some best practices to consider include: having a robust and well defined business process for acquisitions; involving the merger integration team early on in the transaction cycle to identify and accept ownership of synergy opportunities; and conducting extensive due diligence involving commercial, operational, finance and tax, HR, IT and environmental aspects. A good benchmark would be to have a success rate of 50-plus per cent. D. Murali
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