A sector-wise analysis shows that the energy, mining and telecommunications sectors accounted for more that 50% of the total value of M&A deals
As Venugopal mentions, the M&A strategy for MphasiS is designed to accelerate their strategy implementation and support their growth plans
In July 2011, the People Matters’ cover story, ‘M&A - The Indian Way’ presented a compilation of case studies and expert views. Since then, there have been on and off renewed fears of a gloomy economic scenario. As a result, the deal size as well as volume have dipped in India. Presented here is an updated take on the story as 2011 draws to a close.
According to Indian M&A Roundup Q1-Q3 2011 report brought out by merger market, an independent Mergers and Acquisitions (M&A) intelligence service with 177 deals totaling USD26.8 billion, Indian M&A saw a decrease in the first nine months of 2011 of 41.5% by value and 16.9% by volume compared to the same period in 2010. With India's benchmark Sensex slumping almost 23% year-to-date; rising inflation and interest rates and ongoing global woes, it is not surprising that domestic M&A has dwindled in the Q1-Q3 2011 compared to the same period last year. While the M&A deal activity has continued to be stable for the month of October 2011, very few large deals have been announced so far. There have been no deals with value over half a billion and only four deals valued at USD 100 million plus. However, for the first 10 months of the year, the values are significantly higher than 2009 and 2008, but lower than 2010. So far, manufacturing has garnered the largest share of value, followed by healthcare and technology.
The global uncertainty has impacted the fundamentals and the sentiments, indirectly impacting the valuation of merger and acquisitions for India Inc. for the third quarter (July-September) of calendar year 2011. The total value of M&A deals in the first nine months of 2011 was largely accounted for by two inbound deals; BP's USD7.2 billion transaction for acquisition of stake in Reliance Industries' oil and gas properties and Vodafone Group Plc's purchase of partner Essar's 33% stake in Vodafone Essar Ltd. (USD5.46 billion). The Vodafone Group Plc/Vodafone Essar Limited deal announced in July was the second largest transaction recorded in the first nine months of 2011, boosting the Q3 inbound deal value to $7.32 billion.
A sector-wise analysis shows that the energy, mining and telecommunications sectors accounted for more that 50% of the total value of M&A deals involving Indian entities. However, each of the sectors saw a sharp decline when compared to the corresponding period last year. The value of M&A deals in the energy and mining sectors stood at USD7.83 billion, a fall of 35.6%, while telecommunications sector transactions amounted to USD6.13 billion (down 68.7%).
July 2011 issue of People Matters, ‘M&A - The Indian Way’ discussed how from an abysmally low level of deal volume and value in 2009, the following year, that is 2010, was a dramatic turnaround with deal activity at par with the levels of 2007. Bharti Airtel’s acquisition of the African telecom company Zain for USD 10.7 billion was the most significant of the deals in terms of contributions to outbound M&A activity. The reasons for the renewed zeal and zest in the M&A arena, as experts argued could be attributed to a host of reasons including that of improved business confidence, ease of money sloshing around due to quantitative monetary easing by the Federal Reserve, low equity market valuations, the strengthening of the rupee against the dollar and most importantly the availability of assets that offered synergies with existing Indian businesses. In the present context, despite some relief in the global economic scenario, fears loom large over the economic dynamics of European Union. The value of the Indian rupee has weakened further, in fact it is currently trading at its two and half years low of 52.16 as of 26th of November.
Apart from numbers, the story categorically brought forth the point that the success of a deal depended not only on identifying the right targets, but it also required a good due diligence to evaluate both tangibles and intangibles and a planned approach for integrating culture, people and systems. The July special presented two case studies of successful execution of M&A deals - Schneider Electric and MphasiS.
Oliver Blum, Country President and MD, Schneider Electric, opined, “The people angle in a transaction is crucial, especially in India. From pre-deal to implementation, people and cultural synergy is very important, since there is a possible risk of losing key people in the early days of integration-hence eroding the value of the acquisition.” In fact, he goes on to state that closing the deal is just 5% of the overall operation and that 95% of the task involved integrating the teams and making them work together. Schneider’s M&A strategy is based on the premise of accelerating growth and reaching the levels in 5 years which otherwise could have taken 10 to 15 years following the organic approach. For Schneider Electric, M&A is a way to bridge the gap between where they are today and where they would like to see themselves.
While a number of the acquiring companies focus on retaining talent, more so given the demand and supply mismatch in the Indian context, Dinesh Venugopal, Chief Corporate Development Officer, MphasiS argues that it is equally important to retain customers for a successful integration. Organizations can either opt to build capabilities or buy them. While building the relevant capabilities is a slower and of course relatively less expensive process; the buying strategy provides access to faster delivery and helps capture the opportunities. As Venugopal mentions, the M&A strategy for MphasiS is designed to accelerate their strategy implementation and support their growth plans. Integration is integral to the success of M&A activity and the tenants are different when it comes to domestic and cross border integration. According to Venugopal, “In cross-border integration, there are issues related to culture and perception. For example, the meaning of career growth or career opportunity can be significantly different in different parts of the world and hence one has to be sensitive in order to ensure that talent is retained.”
The story also captured views from the M&A experts. Anupam Prakash, Partner, Mercer India agrees that there are not many companies that look at the employee and the HR issue till later into the due diligence stage or worse, and more often till later into the post deal period. This, according to him, is the reason as to why there are a number of cross border deals that have failed to realize the planned business synergy. R. Sankar, Executive Director, PwC is of the opinion that the due diligence stage should include equal consideration to both ‘hard’ and ‘soft’ aspects of the organizations and this makes an interesting case that HR due diligence can indeed avert M&A failures. Sankar suggest that detailed internal and external communication must be prepared and kept ready. It would be useful after the due diligence has been completed and before the transaction date is set in order to work through these and similar issues.”
Experts from Accenture (Deepak Malkani, Lead; Jayesh Pandey, Senior Executive; and Rhiju Bhowmick , Manager – Talent and Organization Performance, Accenture) argue that early focus on post deal organization; human resource transformation, cultural alignment and change management can help avoid value destroying valleys and accelerate the synergy realization. They further state that in the Indian context, complexities arise from differences in HR maturity levels, differing core capabilities and evolving nature of HR service delivery models. Sharad Vishvanath, Principal, Aon Hewitt M&A Solutions and Jaidev Murti, Senior Consultant, Aon Hewitt M&A Solutions put forward the view, based on a research that was conducted by Aon Hewitt across 103 global companies, that in conjunction with retention of key leadership and talent – total rewards is a critical aspect in the valuation and realization of deal synergies. The two experts argue that focusing on the total ‘package’ of pay and rewards and not just the pay, provides acquiring companies with a more compelling platform to engage and retain key talent. Manoj Kumar, AVP, Corporate Professionals Capital Private Limited, held the view that while people issues must be taken due care of; the legal framework governing the transaction is equally significant. According to Kumar, “While M&A strategies originate from commercial considerations, its implementation needs to be carried out keeping in mind the legal framework governing those transactions, tax and other cost aspects, contractual obligations and impact of cultural and HR issues.”
Cut to November 2011; on a positive note, consolidation in the crowded and ultra-competitive 14-player telecom market could become easier with sector regulator, TRAI, proposing an increase in the combined market share and spectrum caps of merged entities. The regulator has recommended that mobile phone companies could merge their operations if the combined market share of the new entity is less than 60%, a substantial increase over the current 40% ceiling. According to Fitch, a rating agency, the proposed M&A guidelines for India`s telecoms sector may lead to the number of players in the market shrinking towards six. The reduction in the number of players in the overcrowded telecom space would provide a more stable environment for companies to invest in their networks. While the commercial and legal issues are often discussed, people too are increasingly becoming a critical issue when synergies are analyzed.
Every Crisis has a Silver Lining
Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities
Understanding the relevance of inorganic growth, there has been a clear emerging trend of stake sales by Indian promoters to strategic acquirers. Indian promoters are realizing the relevance of joining hands with technically-savvy foreign players to grow faster. Further, the fascination for Indian assets amongst global acquirers is increasing with each passing day. This has resulted in several inbound deals happening at significant premium valuations.
If we give a quick look at billion dollar plus deals during the year, they provide an interesting insight into the deal making universe. British Petroleum’s US$ 7.2 billion acquisition in Reliance’s Oil & Gas assets is a landmark deal, both in terms of size and the nature of the deal. This deal also signifies the fact that Indian companies are keen to join hands with global mega companies when they face technical difficulties in execution of complex projects.
Similarly, one more deal of fascination during the year was that of iGate’s acquisition of controlling stake in Patni Computers for US$ 1.2 billion. This deal will give iGate a larger platform to expand faster. This deal also provides promoters of Patni Computers an opportunity to exit.
Vedanta’s acquisition of Cairn’s oil assets is one more high profile deal, with deal sizes crossing US$ 1.5 billion. This deal also signifies that the global players are eagerly searching for opportunities to ride the oil & gas play of India. However, the deal has hit several regulatory roadblocks in India, raising views across Indian corporate circles that regulators have to be more logical and quicker in assessing the deals, to gain the confidence in the international circles.
Vodafone’s buyout of Essar’s stake in the Vodafone-Essar deal is one more interesting deal. The deal value at US$ 5 billion marks the complete exit of Essar from the Indian telecom space.
Considering widespread concerns about the European economy, deal making may get difficult going forward as access to funds gets dried up. However, there may be a silver lining in every crisis.