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Sunday, April 17, 2011

M&A deal value up 270% in January-March

This story first appeared in DNA Money edition on Saturday, Apr 16, 2011.

With the economy gaining momentum, merger and acquisition (M&A) activity, too, has started gathering furious pace.

M&A deals involving Indian companies rose 270% in January-March 2011 to touch $18.3 billion over the numbers reported in the first quarter of last year, according to data by Mergermarket, an independent M&A intelligence service.

Thirty five out of the 57 transactions were inbound deals (over 61%), compared to 27.1% for China and 14.3% for Japan. All the top five deals in value terms were cross border - four inbound and one outbound.

“What was more significant is that the total worth of inbound Indian deals ($16.9 billion) reached unprecedented figures,” Mergermarket said.

M&A advisors say that economic cycle has reasonably or fully recovered, which is showing up in the form of increased traction.

“The economic cycle recovery started around mid 2009 and the momentum continued in the next year as well. That is the key reason behind increase in deal making. There is a change in the base effect, which is evident from the increase in the deal value, though number of deals hasn’t seen a similar growth,” said a senior official from one of the top advisory firms.

Among big-ticket deals, acquisition of Paras by Reckitt Benckiser and International Paper’s acquisition of Andhra Pradesh Paper stand out- especially the latter. Experts say it is the first time that a public company has received such high premium (240%) that too in the paper business, which is not perceived to be very attractive.

“Overall, the M&A volumes will remain and only grow from here. I am certain that we will see strong momentum on the back of economic recovery,” said Gaurav Deepak, co-founder and managing director, Avendus Capital.

Experts said an intrinsic value benchmarking has begun in the Indian market wherein strategic buyers are driving value creation and value discovery, which augur well for the Indian business environment.

While sentiments have improved in the last 12 months, the economic activity was subdued in Q1 of 2010 and the January-March 2011 numbers also included two large deals.

Besides, time taken to conclude these deals is also a key differentiator, feel experts.

“Typically, a cross-border M&A deal for any large corporate is spread over 4 to 5 quarters while it is 6 to 9 months in case of a domestic transaction. In 2009, no corporate was even thinking about doing M&A as focus was largely to swim out of the rough recessionary waters,” said Deepesh Garg, director, o3 (Ozone) Capital Advisors.

The confidence started building in 2010 as a result companies began negotiating deals all over again. So deals that are getting announced in the last few months are the transactions that were in various stages of due diligence and got concluded in the first quarter of 2011, he said.

“In the last 12 to 16 months, corporates stayed bullish, which is largely the reason behind a bunch of deals getting concluded,” he said.

On the impact of long gestation period on deal value, industry experts feel a lot of it depends on how the company has performed in that period, performance of the market, additional bidders for the company, etc. “I wouldn’t say there is a significant change in the deal value from the time negotiation starts to its actual conclusion. However, in case of auctions, the valuations do tend to sway 30% to 40% either ways, depending on the kind of response a particular asset generates from the market,” said a senior official from a leading domestic advisory firm.

On the outlook, experts feel that current traction will continue if economy doesn’t slow down in the coming months. “If everything continues the way it is I am sure the momentum will only pick pace from here with more and more deals getting announced in the coming quarters. From what we have gathered through our interactions with large corporates globally, every strategic presentation has pieces of India as part of their strategy which clearly shows there is a lot of global interest in the Indian market,” said Garg.

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