India Inc. is expected to focus on the home market and avoid venturing overseas for mergers and acquisition (M&A) opportunities, with the covid-19 pandemic disrupting economic activity and growth prospects.
So far this year, Indian companies have signed cheques worth just $428.6 billion to acquire companies outside of India, representing just 0.5% of the global outbound M&A market, according to data from financial markets tracker Refinitiv shows, as the pandemic forced risky bets off the table. For the calendar year 2019, Indian companies acquired overseas companies worth $2.8 billion, representing a market share of 3.4%.
With most professional forecasters painting a bleak picture for economic growth, the second half of the year, too, is not expected to see much action.
“Corporate India is more focussed on India than going overseas. In this environment, I see very little outbound M&A,” said Pramod Kumar, managing director and head of banking at Barclays India.
Most of the large Indian corporates that have the ability to execute outbound M&A are today more focussed on protecting their cash flows and securing their core business than looking at opportunistic deals overseas, he said.
“This is not an environment where companies will be enterprising and take risks like these. Unless people see some strategic gaps that need to be filled and they see an opportunity like that,” said Kumar.
To be sure, India Inc’s appetite for overseas acquisitions has been low for a while.
For the five-year period between 2010 and 2014, Indian companies made overseas acquisitions worth $53.89 billion, while in the period between 2015 and 2019, outbound acquisitions amounted to $29.73 billion, with 2018 as a standout year that saw outbound deals worth $12.9 billion, according to Refinitiv data.
“I don’t think India Inc. is looking at outbound M&A in a big way. The past experiences have not been very encouraging, companies have faced a lot of challenges,” said Utpal Oza, managing director and head, investment banking, at Nomura India.
Access to cheap capital and the overall financing environment for undertaking large acquisitions are also muted at present and given the protectionist tendencies across countries, outbound M&A is not an attractive option for Indian corporates, Oza said.
Certain sectors, however, could be an exception to this overall mood of caution.
“Tech companies are definitely an outlier. This will be a good opportunity for them. The H1-B visa issue could motivate tech companies to look for front-end presence in overseas markets such as the US and Europe. Japan is also a favoured destination. Pharma companies may also selectively consider opportunities especially in injectables and specialty,” he said.
Outbound activity will be low, but there is an increasing inbound interest, as balance sheet stress, the covid-19 lockdown, valuation correction and supply chain diversification will lead to increasing M&A opportunities, Oza said.
“Globally, companies are keen to diversify out of China. Some of these would now look to come to India and acquire scalable assets to establish presence,” he said.
While the pace of overseas acquisitions by Indian companies has slowed down, in the last couple of years some Indian companies have made large marquee acquisition in foreign markets.
In July 2018, agrochemical solutions provider UPL Ltd announced that it is acquiring Arysta LifeScience Inc., a global provider of innovative crop protection solutions, and its subsidiaries for approximately $4.2billion in cash.
The same year, Kumar Mangalam Birla’s Hindalco announced it will acquire US-based Aleris Corp. in a $2.6 billion deal. The transaction closed in April 2020.
