India’s Growth Fails to Enthuse Deal Activity

M&A activity has failed to ignite this year in India and has performed miserably compared to last year. Despite all the hoopla about India being second fasted growing economy in the world, the M&A activity this year hasn’t even been 50% compared to last year. Considering the fact that 2008 was written off financially, performance should have been better this year, a decline is certainly surprising. Last year, for first three quarters $30bn was spend on M&A activity in India and in comparison this year during first three quarters the figures were meager $13bn. The average deal value also fell by half to $33mn from $67mn last year.

Foreign acquires only accounted for just $3.9bn of all such deals this year, which is only 30% of the total deal value. Again this is lower than last year’s share of foreign acquirers in total deal value, which stood at $15.7bn, five times the present value. Last year, Asian countries had dominated the list of biggest acquirers, four out of ten. This year the figure fell to three out of ten.

Mauritius did the biggest turnaround from being at bottom of top ten foreign acquirers to number one this year with $1.2bn acquisition followed by France, which accounted for a quarter of all outside deals. The United States came third with $379mn worth of acquisitions of Indian companies. Japan which was the biggest foreign acquirer last year slid five places to sixth position this year.

This year, Infrastructure sector was the common target sector for both Indian and foreign acquirers, telecommunication and Electric, Gas & Water sector were in top five target sector for both domestic and foreign acquirers. Pharma sector, which was the biggest target sector for both foreign and domestic acquirers, retained its position but only for foreign acquirers, who invested $1bn this year. Indian acquirers made most of the acquisitions in Oil & Gas sector.

Retail food chain was the pick of foreign acquirers it hardly featured on the acquisition radar of domestic acquirers, but foreign acquirers made investment of $100mn. Similarly, domestic acquirers made acquisition worth $677mn in Business Services sector which was almost disregarded by foreign acquirers.

Easy Cash Turns Killers for Indian Retail

The retail boom has come to grinding halt in India. Just a few months back Reliance had announced restructuring of its retail business. Then Subhiksha problem appeared, it was unable to finance its operations. Now, Vishal retail has run into trouble. The company is also facing liquidity crunch and is shutting down a large number of shops and cutting its employee numbers to stay afloat.

Easy money had made it possible for Indian retail companies to go for expansion mode straight from incubation. This had become corporate philosophy for expansion programs of major retailing companies. Every company in hurried desire to gain the first mover advantage had indulged in aggressive expansion on borrowed money. Once the liquidity problem stated becoming apparent in Indian market, these companies started facing cash trouble to run their operations. Easy availability of cash had led to more companies becoming overtly dependent on borrowed money to run their operations.

Subhiskha, like other retail companies over-ambitiously expanded everywhere leaving the company totally starved for cash. They didn’t bother either about its cash flows or cash reserves. This left company bewildered about its future and how to manage the current operations. Vishal Retail another darling of markets, followed similar path of growth and couldn’t see the situation getting out of hands.

Easy availability of cash in the market made retail companies short sighted with assumptions that markets would continue to grown and cash would remain available. This hypothetical assumption got translated into the business model, for which companies are paying today.