Reforms, rupee set Deal Street on fire

This story first appeared in DNA Money edition on Monday, Nov 12, 2012.

The Deal Street has suddenly come alive.

Twenty-seven merger and acquisitions (M&A) were struck in the first nine days of November as compared to about 50 for the entire October. What has changed for the deal makers to shake off the somnolence of the last two years?

Experts said though overall business environment hasn’t changed much, a slew ofreforms by the government since September is leading the companies to bet on a rosy future. 
Vikram Hosangdy, partner — M&A, KPMG India, said, “Sentiment had deteriorated significantly in the September quarter and now most people believe we are at the bottom of the slowdown with a sharp lowering of interest rates seen from January 2013.”

A range of reforms around foreign direct investment as well as the Shome Committee’s stance on tax regulations have improved deal making sentiments, especially on inbound transactions, Raja Lahiri, partner - transaction advisory services, Grant Thornton India LLP, said.

With the western economies in shambles, assets are available there at cheap valuations and a sudden surge in rupee has dramatically reduced costs for overseas acquisitions.
“Outbound transactions like Rain Commodities buying Ruetgers, Infosys snapping up Lodestone and the Sun Pharma’s Dusa deal will continue as long as there is a strategic fit and valuations are reasonable,” said Lahiri.

Though it is rising, the rupee is still comparatively weak against the dollar, which makes Indian assets also cheaper for foreign buyers, said Rajeev Kakkad, associate director, Protiviti Consulting.

Most of the deals are happening in the $25-100 million range mostly in pharma, manufacturing, services, industrials and consumer sectors. However, deals are still taking a longer 6-8 months for getting finalised compared with 3-4 months seen in the peak times.

Experts see the trend continuing and valuations staying high as there are more buyers than sellers. A lot of Indian companies are sitting on huge cash reserves and are actively pursing opportunistic acquisitions in international markets, they said.

Diversifying their businesses for forward or backward integration and expanding presence outside India appear to be major drivers. 
“Many large India groups believe this is a very good time to buy in Europe and US,” said Hosangdy.

And Indian financial services firms, too, are at the forefront of the deal making activity. JM Financial has advised on four large transactions including the $2.1 billion acquisition of a majority stake in United Spirits by Diageo. It was also the sole financial advisor to Wipro for demerger of its diversified businesses.