Indian merger and acquisition (M&A) activity rose to $69.75 billion across 1,195 announced transactions in 2016, a record level fuelled by a wave of consolidation and rising confidence in the country’s economic growth prospects.
M&A activity in 2016 beat the previous record of $66.96 billion seen in 2007, according to data compiled by Thomson Reuters. Activity in 2016 was almost double that of 2015, when 1,306 M&A deals worth $36.68 billion were recorded, the data showed.
The year witnessed major transactions such as the $12.9 billion sale of Essar Oil Ltd, a $4.8 billion merger of Reliance Communications Ltd and Aircel Ltd, and a $3.2 billion acquisition of Max Financial Services Ltd’s life insurance business by HDFC Standard Life Insurance.
The increased M&A activity was driven by structural reforms that the government has announced in the past couple of years, according to industry experts.
“The series of structural reforms undertaken by the government over the past 24 months has helped create an environment of greater confidence on long-term sustainable growth. This has paved the way for investors to take long-term investment decisions leading to a sharp pick-up in M&A activity,” said Ashok Wadhwa, group chief executive officer at Ambit Pvt. Ltd.
Indian conglomerates have used the increase in investor interest to sell assets for deleveraging balance sheets and utilizing cash flows for investments in core businesses, which has been a significant driver of transactions in the infrastructure sector, he said.
The deal activity in the year witnessed a sharp pick-up on the inbound and domestic M&A fronts. While inbound M&A transactions grew by 72% to $33.37 billion (across 304 deals), domestic M&A transactions grew almost three times to $26.58 billion (across 687 deals).
Outbound M&A transactions also grew by 64% to $8.39 billion, though overall they contributed to a small proportion of the M&A activity.
The sharp uptick in domestic M&A deals is a sign of increased consolidation in certain sectors, said Anshul Gupta, managing director and head of M&A at Citi India.
“Domestic activity was a reflection of much-awaited consolidation activity in certain capital-intensive and cyclical sectors such as cement, power, and metals and mining. Corporates with stronger balance sheets saw this as an opportunity to consolidate market positions, particularly as many global buyers remained distracted in their home geographies,” he said.
The trend also reflects confidence in the long-term economic potential of India, Gupta added.
Consolidation, as a driver for M&A activity, is expected to continue in the near to mid-term future.
“There is increased confidence, but we are also seeing a marked change in trends with industry leaders announcing or considering consolidations. Transactions like these will position these companies better for growth and help drive meaningful synergies and also benefit stakeholders across the board—customers, shareholders, employees. We expect more of this to pan out going forward,” said S. Sundareswaran, head of M&A for Morgan Stanley in India.
Sectors that are directly linked to the consumption story—financials, consumer, healthcare, the Internet and real estate—will likely see good momentum on the M&A front, Sundareswaran added.
M&A activity also increased as financial sponsors such as private equity funds, sovereign wealth funds and pension funds increased investments in the country.
“Exits for private equity funds have also been an important driver for inbound M&A. Global strategics are comfortable in acquiring companies with PE ownership. Interest from pension funds and sovereign wealth funds is high, particularly in well-managed, stable cash flow-generating assets,” said Wadhwa of Ambit.
Greater levels of ownership of private equity funds are playing an important role in the trend of domestic consolidation, he added.
However, going ahead, experts do expect some headwinds to the fast-paced M&A activity that was witnessed in 2016.
The demonetization of high-value banknotes, which was announced by the central government on 8 November, is a key near-term challenge, though the medium to long-term prospects remains bright, industry experts said.
“Demonetization could lead to a temporary impact on the performance of companies in FMCG (fast-moving consumer goods), auto, healthcare services and other consumption-led sectors, which in turn could lead to a potential broadening of the bid-ask gap in valuations,” said Gupta of Citi.
Over the medium to longer term, the India growth story remains intact and many global companies will continue to chase growth outside of their home countries, which will continue to drive M&A momentum, Gupta added.
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