India Inc settles for smaller M&A deals

ICICI Bank's Global Head (Investment Banking) Kalpesh Kikani says the time for multi-billion dollar deals is over.

"India Inc's appetite for large deals has gone down. In any case, financing such deals would be tough," he says.

Kikani should know; his bank achieved the highest $434 million value of deals in the mid-size segment in the first half of 2009.

M&As are back on the radar for Indian companies, but with two vital changes. First, the average size of the deals are much smaller compared to the earlier years; and second, overseas acquisitions have taken a backseat.

In July and August this year, for example, Indian companies were involved in 34 domestic deals worth $543 million, with an average size of just $16 million. Outbound deals have shrunk to $90 million against $4.9 billion in the corresponding period of the previous year, according to data provided by Grant Thornton.

Consider the Tata Group, which set a scorching pace on acquisitions in 2007 and 2008 -- the $12.2 billion Corus deal happened in 2007 and the $2.3 billion Jaguar Land Rover deal in 2008. In 2009, the group's only acquisition is that of Sea Rock hotel in Mumbai by its group company, Indian Hotels, for Rs 680 crore ($142 million).

Experts see many reasons that deal sizes and overseas acquisitions have fallen drastically. The big boost to overseas acquisitions by Indian companies was access to easy credit from banks before the credit crisis.

"We are coming from an era of excesses when leveraging norms went for a six," says Saurabh Agrawal, managing director and head of investment bank at DSP Merrill Lynch. Companies leveraged their balance sheet seven to eight times of the operating profit as there was excess liquidity available in the system at that point of time, explained Agrawal.

Now with banks getting cautious, leveraging levels have come down. This has led companies to using their internal accruals. So large-tickets deals such as the proposed $ 23 billion Bharti Airtel and MTN deal can only be an exception now.

"Risk management has become more important now," says B R Jaju, who as chief financial officer was involved in many acquisitions by Crompton Greaves in the last couple of years. One of those included French company Sonomatra in 2008. He moved out of the company this month to join Welspun Gujarat as director and chief financial officer.

"We can't expect the earlier aggression for large-size deals at least for the next one year," he says.

Experts say most of the acquisitions by Indian companies in the past were heavily leveraged and now a majority of these predators are struggling to service the loans for acquisitions.

The big Indian companies now realise that it is not easy to integrate large facilities bought from outside owing to serious cultural and regulatory issues in moving production to India.

Instead, domestic companies are looking at lower-risk risk small acquisitions like the recent deals of Lupin and brand buy-outs to boost business.

Sujay Shetty, associate director of PricewaterhouseCoopers, says "Now, large loans for acquisitions have dried up for Indian companies. Thankfully, wisdom prevails in most boardrooms than simply jumping into acquisitions without proper homework."