The M&A scene in India has being growing from strength to strength with Indian companies logging an astounding USD 129 billion in M&A deals in 2018, of which inbound M&As formed USD 55.8 billion (Livemint, January 2019). This goes on to not only show the robust domestic market but also the faith of foreign investors in the Indian markets as a whole. Some of the marqee deals which resulted in these impressive numbers are the USD 16 billion acquisition of Flipkart by Walmart, USD 7.5 billion acquisition of Tata Steel BSL Ltd by Bamnipal Steel Ltd, USD 6.2 billion acquisition of Indus Towers Ltd by Bharti Infratel Ltd, USD 3.8 billion acquisition of certain health drink brands of GlaxoSmithKline Consumer Healthcare Ltd by Hindustan Unilever, amongst others.
What are the reasons for such a boom, one may ask. To answer this question, one needs to delve a bit into what drives M&As in general and what have been the considerations driving it in India. M&As are usually fuelled primarily by factors like (i) the desire for rapid inorganic growth, (ii) wish to reduce dependence on external parties in the supply chain via backward or forward integration, (iii) anti-trust provisions, (iv) consolidation due to competition, (v) hiving-off non-core businesses and assets for debt reduction (especially given the liquidity crunch in the market), (vi) bringing economies of scale, (vii) acquisition of ready-to-use ‘mission-critical’ technology, (viii) access to new markets, amongst others. Let us now analyse some of the trends which have emerged in recent times in the M&A space in India.
Trends & Future
A couple of trends which have emerged during the past year in the M&A space which have been fuelling the space, and which ought to be scrutinised closely to look into the future and for a better understanding of the ‘lay-of-the-land’ are: (i) A bulk of M&A deals concluded, and expected to be consummated in the future, are based on the bedrock of ‘consolidation’. Companies understand the value add brought in by consolidation, viz. improvement in their size, operating model, scalability, access to technology and newer markets and improved operational efficiency, (ii) While global private equity players have been active in the M&A space in India, the recent years have shown rekindled interest from global strategic buyers as well who have bought into the ‘India growth story’, given the relative slow-down in the Chinese economy, (iii) Though traditionally, private equity funds have been keen to acquire significant minority interests in companies, in recent times, a lot of them have been engaged in buy-out deals. They have come of age and are more than willing to deploy the knowledge of Indian market and businesses acquired over time to efficiently put together management teams and get boots on the ground to realize the maximum potential of the acquired companies, (iv) Owing to the new angle brought in by the Insolvency and Bankruptcy Code, 2016 (“IBC”) in the form of banks being forced to initiate the IBC process within 180 days of default, it is expected that several assets will be put on the block for insolvency resolution/ turnaround, leading to more M&As by strategic investors, as well as private equity funds, especially via platform deals, which seem to be the flavour of the month, given the focus by investors on the delicate interplay between governance, performance and the need to deleverage, (v) A fair number of large corporations like United Spirits, Tata Power, PNB, etc. have been hiving off their non-core businesses and assets to address stretched balance sheets, pare debt and to fund further growth, thus stimulating M&As, (vi) The US-China trade war may be a boon for the India, especially in light of the aggressive ‘Make in India’ campaign by the Government of India wherein manufacturing sector is being given a fillip through various ways and means. In addition to the attractiveness of such companies to US based strategic investors and PE-buyout funds, the fact that the IP laws and regime in China are attuned to favouring Chinese companies leading to numerous IP infringements, blatant thefts of US companies’ IP, may push more foreign investors and corporations to Indian shores searching for growth, (vii) Inclusion of global deal documentation standards, especially typical US deal terms in India M&A documents (altered to suit the distinctive Indian regulatory conditions) like earn-outs, escrows, extensive use of representations and warranties, indemnifications, etc. have given a high level of comfort to foreign acquirers, who know what they are getting into by signing the dotted lines, (viii) Renewed interest of global pension funds and sovereign wealth funds (especially from Singapore, Canada and Abu Dhabi) owing to attractive prospective returns are also giving a boost to M&As, and (ix) Last, but not the least, the political scenario of the country should not be ignored while crystal ball gazing, for the policies and regulations (especially Securities, Foreign exchange related, Income tax, Companies and Competition laws) that may make or break a sector depend on which way the political winds blow (case in point being the recent restrictions imposed on FDI in the e-commerce industry). The results of the general elections in 2019, and the regulations/policies made post that by the new Government, may affect the M&A space, though your guess would be as good as mine on the extent of the same.
To sum up, in my opinion, though there may still be issues impeding the growth of M&As in the Indian market and regulations, the robust India growth story based on solid economic indicators coupled with the fact that companies usually take such decisions with an eye on the long-term should act like winds filling the sails of the M&A juggernaut, helping it slice effortlessly through the seas of uncertainty.
About the Author
Prashant Kataria is a Partner at Lexygen, a Bangalore-headquartered law firm (with an office in Singapore) with a pan-Indian focus on providing services connected with M&As, Joint Ventures, general corporate commercial services, PE/VC and Project Finance, and an alumnus of the prestigious National Law School of India University, Bangalore.
He has over 15 years of legal transactional experience in the areas of M&A, private equity, venture capital, and infrastructure privatization projects. Over the course of his career he has garnered significant experience advising several corporates on diverse corporate-commercial matters, including employment/labor law, real estate leases, trademark licensing, telecom regulatory, and so on.
M&A Boom in India: Recent Trends and a Bit of Crystal Ball Gazing
