Outbound M&A deals rose last year, but restricted to a few sectors

Industry:    2016-01-21

Overseas acquisitions by Indian companies have picked up again, after a brief lull, although deal activity this time is restricted to companies from cash-rich sectors such as information technology and pharmaceuticals. Deals to secure natural resources, which drove outbound deal activity in previous years, is absent from the mix this time because of the stretched finances of many of these companies. Outbound mergers and acquisitions (M&A) adding up to $5.4 billion were closed in 2015, compared to $2.54 billion a year ago, according to data from Thomson Reuters. While deal activity is picking up, the underlying drivers are significantly different from 2005-08 and 2010. In 2015, overseas acquisitions were led by the healthcare sector with 24 deals totalling $1.75 billion. The information technology services sector saw 36 deals totalling $719.8 million being closed. The energy sector witnessed transactions worth $1.26 billion, but on the back of a single large deal—that of ONGC Videsh Ltd’s 15% stake acquisition in Russian oilfield Vankorneft AO for $1.25 billion. Collectively, healthcare and IT contributed to almost half of the total outbound M&A deal value in 2015. This is in stark contrast from 2007 and 2010 when outbound M&A worth $23.34 billion and $29.1 billion, respectively, were reported. Healthcare and IT contributed to 15% and 5.6%, respectively, in those years. Bankers point out that the biggest driver of outbound M&A in those years—the need to secure resources—is lacking today. “The broader commodity sector is no longer an acquirer, except for government oil companies, which continue to look for assets,” said Sanjay Bhandarkar, managing director at investment bank Rothschild India. The key driver for overseas acquisitions today is the need to acquire access to new products and technologies along with the desire to expand and consolidate presence in major markets, say bankers. “In the case of pharmaceutical companies, acquisitions have been aimed at building presence in key markets such as the US or Europe, and also towards adding capabilities in the therapeutic areas of interest,” said Raj Balakrishnan, co-head of investment banking for India at Bank of America Merrill Lynch. Lupin Ltd’s $880 million acquisition of US generics firm Gavis Pharma Llc in July was aimed at helping the company revive sales in the US, by providing it access to a number of speciality generic drugs that treat niche diseases. Cipla’s $500 million acquisition of InvaGen Pharmaceuticals Inc. served a similar purpose of gaining scale through a wide-ranging product portfolio in central nervous system, cardiovascular system, anti-infectives and diabetes. IT firms too have gone shopping for new technologies to add to their capabilities. In Febraury, Infosys Ltd announced that it is acquiring US-based automation start-up Panaya, whose automation technology will help the firm renew and differentiate its service lines. Wipro Ltd went out to acquire a Danish strategic design firm and an IT services provider for the alternative investment management industry. Companies from these sectors have also been helped by the fact that they have strong balance sheets and cash flows unlike companies from the commodities, infrastructure and energy sectors, which are struggling with high debt and declining profitability. According to an October report by India Ratings & Research, out of the Rs.31.99 trillion of balance sheet debt of the top 500 listed corporates (excluding banking and financial services), 69% of the debt is attributable to only five sectors—power, metals and mining, oil and gas, infrastructure and telecom. Debt levels have also constrained their ability to buy assets at a time when global commodity prices have fallen significantly, leading to reduced valuation of commodity assets such as mines. In addition, past experience of having bought commodity assets at the peak of the commodity price cycle in the pre-2008 crisis period is also keeping some companies away from acquisitions, said bankers. “If you look at the balance sheets of companies which have been acquisitive in the past, they are heavily leveraged and their business in India is also not doing well. These companies do not have the risk appetite to go out and acquire commodity assets,” said Pramod Kumar, managing director, investment banking at Barclays Capital. “One might take a contrarian view that this is a good time to buy assets as prices are low, but even from that perspective, people are not convinced because we are seeing new lows every day as seen in crude prices,” he added. Companies also find themselves further constrained by public markets investors who have in the past taken several companies to task over their overseas acquisitions, said bankers. “In the current environment, public markets investors are, generally speaking, not inclined to reward you to build an international business, certainly not in situations where the balance sheet is not strong,” said Anjani Kumar, head of investment banking at CIMB India. Investors are questioning the rationality of overseas acquisitions where synergy is not apparent or immediate, he said.

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