The government recently completed two years in office and amid much fanfare, laid out its achievements on socio-economic indicators such as GDP growth, inflation, cost of capital, ease of doing business, corruption etc. to make a case for its superior performance. From an M&A practitioner’s point of view, one of the interesting aspects to delve into is the analysis of M&A activity and how that is a barometer of economic health of a country. Equally important is to assess the situation of legal/ regulatory framework and structural reforms which would spur the M&A activity leading to efficient capital allocation and thereby lead to better economic outcome for all stakeholders.
From a global perspective, the last few months have seen large transactions involving consolidation among competitors, forward/ horizontal integration — much of this is fueled by slowing growth and cheap money availability; the Indian context is however, quite unique.
At the outset, lets shun the figures of total deal values, private equity fund raising from LPs, successful capital raising etc. — they tend to influence the narrative too much, one way or the other. Due to aggressive pitching of the “India story” by the government, including the PM personally, M&A in India is strongly on the radar — while not many strategic M&A transactions have happened as one would have expected, the stage has been set for the next few years. With uncertainties around global growth and most of the emerging markets in doldrums, it is logical to expect a strong uptick in global companies acquiring assets in India. The loose monetary policy being followed by global central banks has meant that acquisition financing is easy and cheap — this is helping global strategic buyers. However, India’s perception of being a difficult place to do business is an often heard concern, and will probably take more concerted effort on policy making and its administration for such issues to be allayed.
While there is a lot of talk about India becoming a credible alternative to China as the “factory of the world”, most of the global strategic investors still look at India as a huge consumer market and more often than not, M&A transactions are geared towards this end objective. Even from India’s perspective, we need to choose our battles carefully — it probably doesn’t make sense to replicate the “China model” which in itself would be a herculean if not an impossible task, and then not having global demand to service.
At the same time, there are certain sectors with clear succession issues and need for technology upgradation to meet consumer requirements — companies in these sectors are ripe candidates for global buyers. Even the private equity investments made during the second half of last decade are looking at strategic buyers to provide them with the necessary exit. Overall, we expect an increased level of strategic M&A transactions involving global buyers acquiring Indian companies. This should augur well for the economy and all stakeholders as India will get more integrated into the global industrial and consumer markets.
The last few years have seen relatively muted PE activity barring a few sectors and in particular, the e-commerce/ consumer internet side. After the spoils of last decade, it seems that sanity has returned to the PE market with deals being evaluated more deeply and better thought through valuations/ deal structures. Since the last few months, it’s quite clear that the same realization is dawning on the players in e commerce/ consumer internet side — we expect this space to undergo consolidation in the near term before the next wave of significant capital raisings happen. There is also a noticeable increase in exit of PE investors through IPO and strategic sales which should lead to better capital turnaround — cleanup of the past is however, a tough and arduous road for the next few years.
Over the next few years, we also expect that the cleanup of the banking system would throw up several M&A and restructuring opportunities. The recently legislated Bankruptcy Code is a step in the right direction and if implemented quickly in its true spirit, would open up opportunities for global strategic buyers, specialised asset reconstruction companies, private equity investors, strong domestic buyers — this is a space waiting to explode in terms of M&A activity and is critical to ensure that capital gets released and redeployed in a more efficient manner.
While the Bankruptcy Code is a welcome step, some other parts of our regulatory architecture impacting M&A need a relook. For instance, it’s not allowed to use debt (local or overseas) to undertake acquisitions in India — globally, LBOs are one of the commonly used modes of financing M&As. To a certain extent, one can understand the conservative thinking within the policy makers that permitting LBOs may lead to reckless acquisitions or a run on the currency, but the current situation with bank NPAs probably reflects the need for better due diligence by banks, whether for greenfield projects or M&As. In any event, with some loopholes in the legal provisions, creative Indian CFOs and their advisors often develop structures which are akin to using debt for acquisitions. Hence, there may be some room to give flexibility around LBOs with suitable checks and balances attached.
Another aspect which could be looked into are the regulations for privatizing a listed company during an M&A process. This is one of the key wishes of a potential acquirer while looking at a publicly listed company – while the overall intent of regulators to benefit public shareholders in a delisting process is welcome, in terms of practical implementation this generally ends up benefitting professional brokers and arbitragers.
The legislative machinery also needs to clean up the Companies Act, 2013 which made doing business in India more difficult with needless regulations and restrictions which hamper day to day business activity. With almost half of the NDA government term over, one could look at the current situation as glass “half full” rather than “half empty”.