M&As hit a high in 2017, value down

Chennai: The year 2017 proved one of contradictions for Indian companies’ merger and acquisition (M&A) activities: Even as the number of M&A deals increased 14 per cent from a year earlier to the highest since 2010, the overall value declined 12 per cent to $46.8 billion from $53.2 billion in 2016.

According to consultancy firm EY’s latest ‘Transactions Annual’ report, the number of deals during the year stood at 1,022, compared with 895 the previous year. Market expansion and entry into new markets, digital disruption and sector convergence were seen as the primary drivers.

Domestic deals continued to dominate overall M&As, accounting for 67 per cent of the total, as home-grown companies preferred the inorganic route for growth. In value terms, domestic deals stood at $37.9 billion, or more than three-fourths of the total disclosed value, a first for India’s M&A deal market.

Interestingly, 127 deals (worth a total of $10 billion) were related to restructuring. These accounted for 19 per cent of all domestic deals in volume terms and 27 per cent in value terms. The local M&A market saw three deals in 2017 that were worth more than $1 billion; these totalled $5.3 billion in value.

The year also saw 340 cross-border deals, with a cumulative disclosed deal value of $8.9 billion – these were 7 per cent fewer than a year earlier, and cumulatively 71 per cent lower in terms of deal value.

A total of 203 inbound deals took place during the year, with a cumulative disclosed deal value of $6.5 billion. While the volume of such deals remained nearly flat, the value saw a decline of 69 per cent from $21 billion the previous year, partially due to a high base effect.

On the outbound front, the year saw 137 deals with a cumulative disclosed deal value of $2.4 billion, a fall of 16 per cent y-o-y in volume terms from 163 last year, and 76 per cent in value terms from $9.6 billion. Country-wise, the US continued to be the most active cross-border partner, with participation in 71 inbound and 45 outbound deals. It was followed by Singapore (18 inbound, 9 outbound) and Japan (23 inbound, 1 outbound).

Among sectors, telecom saw the highest yearly deal value in 10 years — at $14.7 billion, it was an over five-fold jump from that in 2016. On the volume front, however, the number of deals at 19 was the same as in 2016. The bulk of the transactions was domestic, accounting for 92% of the sector’s total deal value and 58% of the deal count. This was followed by retail and consumer products, technology, financial services and others.

Amit Khandelwal, partner and national leader, Transaction Advisory Services, EY, says, India recorded a healthy M&A activity in calendar year 2017. While there was an increase in the number of deals, they were concentrated in the lower band of around $20 million.

The big-ticket deals in 2017 were fewer than those in 2016, as companies held back from venturing into big-ticket acquisitions. In addition, the timeline of some of the big-ticket deals got stretched due to increased scrutiny by the regulators and complex deal structures.

“The momentum in deal volumes is expected to sustain in the coming year, as the government chalks out a comprehensive reforms plan for 2018 to improve the business and investment climate. Sectors like technology, life sciences and financial services are expected to attract significant investor attention,” he said.

Outlook for 2018

The M&A outlook for 2018 looks promising, especially with a stable macroeconomic environment, positive deal fundamentals and buoyant business confidence.

In addition to traditional M&A drivers, such as consolidation and market penetration, deal activity will be increasingly triggered by disruptive pressures like technological innovation and digitisation, which will continue to redefine growth priorities.

The domestic market is expected to be at the forefront of the deal activity, as bigger players will adopt the inorganic route to expand/consolidate their market positions to better cater to a recovering local consumption.

In addition, divestments by highly leveraged players will also continue, with the implementation of the Insolvency and Bankruptcy Code pushing early resolution of such stressed cases.

In terms of cross-border activity, there is likely to be a sense of caution this year as well, given the global geopolitical uncertainty and volatile trade dynamics. Nevertheless, Indian players, especially in the pharmaceutical and technology sectors, would continue to scout for potential foreign targets to complement their existing offerings and provide a platform for incremental growth, said Khandelwal.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.