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INTRODUCTION
Mergers and acquisitions (M&A) have emerged as an important tool for growth for Indian corporates in
the last five years, with companies looking at acquiring companies not only in India but also abroad.
Understanding the complexities of the various financing structure, including LBO financings, proper duediligence procedures & managing cross-cultural HR issues are crucial for the success of an M&A deal.
This note highlights the M&A activity in the world and India. It also discusses the new Competition Act
framed by the Competition Commission of India. This is followed by the outlook on the M&A activity in
India.
Private Equity firms, which played a major role in the world of mergers and acquisitions for the past three
years, tumbled to US$152.4 billion in announced deals during the first half of 2008 10% of the overall
volume as against US$644 billion over last year at this time. The announced mergers and acquisitions
deals in first half of 2008 were lowest since 2005. There was no leveraged buyout over US$5 billion since
July 2007 due to lack of financing opportunities. Sovereign wealth funds have partially compensated for
decline in M&A activity from private equity firms by investing US$25 billion in first quarter of 2008.
Region
No. of Deals
(US$ mn)
(1H08)
(1H07)
(1H08)
(1H07)
(1H08)
(1H08)
1,566,775
2,435,624
18,488
21,861
84.7
111.4
709,929
1,193,235
6,377
7,785
111.3
153.3
594,736
1,002,293
4,655
5,838
127.8
171.7
23,474
28,503
430
391
54.6
72.9
Europe
534,736
935,029
5,705
7,463
93.7
125.3
260,711
210,851
4,722
4,890
55.2
43.1
of which Australia
70,336
63,887
964
1,181
73.0
54.1
of which China
50,190
31,383
1,302
1,087
38.5
28.9
24,609
33,335
477
597
51.6
55.8
37,924
68,006
1,254
1,332
30.2
51.1
Worldwide
Americas
of which United States
Japan
Source: Thomson Financial
Consumer staples, energy & power and financials sector accounted for nearly half of the worldwide M&A
in first half activity of 2008 driven by InBevs proposed acquisition of Anheuser Busch for US$55.5 billion,
Mars US$23.2 billion acquisition of William Wrigley and Australias Westpac Bankings US$17.9 billion
acquisition of rival St George Bank.
No. of Deals
Consumer Staples
259,237.90
1 ,145
248,893.50
1 ,423
Financials
222,235.60
1 ,936
Materials
142,217.00
2 ,311
Industrials
128,536.10
2 ,666
2007
Global announced merger and acquisition activity reached an all-time record of US$4.5 trillion in 2007, an
increase of 24% over last year's announced M&A deals. The fourth quarter activity surpassed US$ 1
trillion driven by cross-border investments by Middle Eastern and Asian investors despite slowdown in
credit markets in third quarter of 2007.
Financials sector led as the most active sector in announced M&A for 2007. The sector had volume
totaling US$731 billion. The industry's total was aided by the biggest ever takeover of ABN Amro by a
consortium led by the Royal Bank of Scotland. The Materials sector ranked second with volume totaling
US$649 billion. This was followed by energy & power totaling US$623 billion in M&A activity.
Americas
Announced M&A deal volume in the Americas in 2007 approached US$2.4 trillion, up from US$ 2 trillion
total of 2006. Average deal size of announced deals decreased in 2007 by 6.6% from US$140.5 million to
US$131.2 million. M&A volume in 2007 for announced deals with a US target increased 9.4% to nearly
US$1.6 trillion from US$1.5 trillion in 2006 as against increase of 35.7% in 2006 over 2005.
Europe
Outpacing the US after it did in 2002; European M&A activity surpassed the US$1.8 trillion mark in 2007,
an increase of 36.2% as compared with the previous year. BHP Billitons US$192.8 billion offer for Rio
Tinto in the mining sector, and the RBS-led consortiums US$99.4 billion takeover of ABN AMRO
accounted for 16% of the announced M&A deals in Europe.
Asia
Announced Asia (ex-Japan) M&A activity reached a record US$448.8 billion during 2007, a 55% upsurge
from the US$289.5 billion recorded in 2006. Moreover, the total number of announced transactions in the
region increased by 11.7% to 8,368 deals in 2007. Financials was the busiest sector second time in a row
in the Asia (ex-Japan) region with deals nearly doubling to worth US$109.7 billion (24.4% market share)
from US$55.5 billion in 2006. The Energy & Power sector followed with a 16.5% market share from
transactions totaling US$74.3 billion. The third most active industry was the Materials sector, which had
an aggregate of US$48.3 billion worth of deals. Australia overpowered Chinese companies in 2007 as the
most favored targets with 2,007 deals totaling US$114.5 billion. Activity in China totaled US$76.9 billion.
Hong Kong targets was third most sought after and accounted for 770 deals worth US$27.3 billion.
Globalization has spurred an unprecedented surge in cross-border merger and acquisition activity. Cross
border M&As have become a fundamental characteristic of the global business landscape. Cross-border
M&As are one mode of entry for foreign direct investors to host economies. The ownership advantage,
location advantage and internalization advantage, factors such as the search for market power, efficiency
gains through synergies, size, diversification, and financial motivations affect the decision of firms to
undertake cross-border M&As. Organizations which aspire to expand across geographies are funding
their cross-border acquisitions through a mix of local and foreign financing. According to World Bank
statistics, new capital raised through corporate securities offerings and loans from international bank
syndicates totaled US $400 billion in 2006, a threefold increase from 2003.
Multi-national companies based in developing countries made more than 700 cross-border M&A
purchases in 2006, up from just 11 such deals in 1987. These developments have put some of these
companies on par with large companies from developed countries. As many developing-country
governments have eased their policies toward capital outflows, their companies have expanded their
operations abroad. 15000 multinational corporations have their presence in developing countries. Cross
border M&A activity was one of the primary reasons for increasing FDI outflows from developing
countries. The total cross-border M&A activity from the developing countries was valued at $80 billion in
2007, up from $75 billion in 2006. The activity was across sectors with service sector contributed about
60% of the total activity.
Indian M&A activity totaled US$19.8 billion in FY08 as compared to US$33.1 billion in FY07. The decline
in M&A activity was in line with the global activity. The average size of deals in FY08 was US$23.4
million; far lower than that of US$70.5 million in FY 07. Cross-border M&A totaled US$8.2 billion in FY08
after declining of 56.3% from the previous year, where the total cross-border M&A was US$18.7 billion.
The sector which witnessed highest decline (97.6%) in M&A activity was the telecommunication sector
due to the base effect of acquisition of Hutchison by Vodafone in FY07. Followed by telecommunications
sector was the healthcare sector; declining 72.3% in FY08 again due to the base effect of US$1 billion
acquisition of Matrix Laboratories in FY07. Financials sector was the third sector to experience decline in
the M&A activity.
Consumer
Discretionary, 17.0%
Utilities, 0.0%
Telecommunication
Services, 7.9%
Consumer
Staples, 3.2%
Energy, 1.0%
Financials , 34.8%
Materials, 20.8%
Healthcare, 1.7%
IT, 3.3%
Industrials, 10.2%
Source www.vccircle.com
Consumer
Discretionary, 2.1%
Utilities, 0.2%
Consumer
Staples, 1.2%
Energy, 0.1%
Telecommunication
Services, 46.1%
Financials , 32.6%
Healthcare, 3.6%
Industrials, 3.3%
Source www.vccircle.com
The new Competition Act passed by the Competition Commission of India (CCI) is considered to be a
concern for the organizations that consider inorganic route to as a crucial part to expand their businesses.
This is because of the restrictive norms under the proposed Act. The proposed act has following rules:
It was voluntary to intimate CCI on the M&A activity in the previous Act. Under the proposed Act,
it has now become mandatory for companies involved in mergers and acquisitions to notify CCI
about the proposed deals (merger, amalgamation, acquisition) if the individual companies
combined assets are at least Rs10 billion (US$500 million including Rs. 5 billion in case of a
foreign and an Indian company) or if the combined annual revenues are at least Rs. 30 billion
(US$ 1500 million including Rs. 15 billion in case of a foreign and an Indian company). Based on
the trailing twelve months data as on December 31, 2007, 281 companies out of NSE 500
companies have either Rs. 10 billion of assets or annual revenues of Rs. 30 billion on an
individual basis. These limits are specially going to have an impact on the banking sector post the
opening up of the banking sector to foreign players in 2009. The pressure on banks to
consolidate is likely to increase further as atleast 75 of the 107 banks meet the aforementioned
criteria on individual basis and will have to be reviewed by CCI.
No type of combination will come into effect until the earlier of 210 days from the day of
submission of notice of combination to CCI or any order passed by CCI. The previous Act had
stipulated 90 days for the same purpose. Such an extended gestation in the M&A activity would
give rise to uncertainties amongst the acquirer and target companies; especially for the big-ticket
acquisitions. The uncertainty may have several implications on the stakeholders including
perception among customers, inability of making strategic decisions, the morale of the employees
and the shareholders perception on the shareholders value. In other economies, the time limit is
prescribed in a step-wise manner which includes initial investigation and detailed investigation.
The detailed investigation is required only in case of queries on the initial investigation. The time
limit for initial investigation in the US and European Union is 30 days and 25 days respectively.
The detailed investigation has additional 30 days and 90 days respectively.
OUTLOOK
A recent study indicates that most of the M&A deals happened globally since the beginning of this century
have resulted in consolidation of the industry. Globally, acquisition of Arcelor by Mittal Steels, Daewoo
Trucks by Tata motors and domestically acquisition of Air Sahara by Jet Airways further emphasizes that
companies are aiming to foster the synergies by economies of scale apart from other criterion such as
gaining new market, maintaining existing share, etc. However, the M&A activity in India is expected to go
slow in FY09. Financing is one of the major issues at this point in time. This is primarily due to the liquidity
crunch and slowdown in primary markets. Recent increases in repo rate and cash reserve ratio by RBI
has led to increase in the prime lending rates by various banks. This has made LBOs a challenging task.
The restrictions in the external commercial borrowings have limited the foreign borrowings to finance
acquisitions.
APPENDIX 1
Key Drivers for M&A
Companies need to offer services across geographies to compete effectively. Mergers and
Acquisitions help in reducing the lead time required for achieving global scale.
Gaining global market share (higher volumes for economies of scale and rollout of business
models to other regions)
Secure long term access to raw materials and key parts of supply chain
Customer acquisition
De-risking the business model by acquiring plant capacities in various locations to beat the
business cycle
The availability of many companies for sale in Europe and USA and liquidation of private equity
investments in these regions are often cited as primary triggers for overseas acquisition.