2017 likely to be promising for M&As

January , 2016

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By

Amit Khandelwal

National Director & Partner, Transaction Advisory Service, EY India

The past year saw mergers and acquisitions (M&A) activity at its peak as compared to the previous few years. A resilient domestic economy, coupled with healthy capital markets and easing credit conditions, helped steer the momentum behind deal activity across domestic, inbound and outbound transactions. Overall, the announced deal value at $52.6 billion saw a surge in 2016 (as compared to $31.3 billion in 2015) though there was a marginal decline in deal count. Inbound transactions saw a quantum leap from $9.9 billion in 2015 to $20.1 billion in 2016.

Some large-ticket deals had a big role to play in driving an increase in value, with the oil & gas sector driving significant traction. Other sectors that helped add to the momentum with transactions of over $1 billion were pharmaceuticals, financial services, cement, media and power (both renewable and thermal). The year also saw an interesting trend of mergers between domestic groups (HDFC Life and Max Life, Videocon d2h and Dish TV) which has hitherto been a rare phenomenon in the Indian context.Notwithstanding the short-term impact that demonetization could have on the Indian economy, as brought out by the Reserve Bank of India’s revision of the gross domestic product growth estimate for FY17 from 7.6% to 7.1%, the mid-term to longer-term outlook is expected to stay positive, thereby favourably impacting M&A in 2017.

Key sectors to drive growth in M&A

M&A activity in 2017 is expected to stay positive owing to the continued interest of financial and strategic investors in the Indian economy, with select sectors like technology, life sciences and financial services expected to attract significant investor attention in 2017. A focus on consolidation and fund raising are set to be the major themes that will dominate the momentum behind M&A and specifically so for the financial services, infrastructure and the life sciences sector. In financial services, the possibility of new business models emerging post demonetization, continued fund raising by non banking financial companies and a consolidation push by micro finance firms will play a big role.

Similarly, consolidation, coupled with the shareholding changes driven by FDI regulations will drive deal activity for the insurance sector. These twin themes will also favourably impact the deal activity for healthcare, while outbound M&A for pharma will anchor on Indian companies’ evaluating opportunities to consolidate in the regulated markets.

For infrastructure, Infrastructure Investment Trusts (InvIts) could be an emerging theme in 2017 as interest rates soften, coupled with their ability to provide low cost financing for the sector. Heightened deal activity will continue in the renewables and roads/highways space. In the technology space, an increase in IT spends could prompt continued investor focus on the social, mobile, analytics and cloud (SMAC) segment, as also platform-based tech companies due to a shift to cloud and software as a service or SaaS-based models. Private equity is expected to remain aggressive in the services segment as it provides scale plays as compared to SMAC. For oil & gas, the national oil companies’ focus on exploration and production(E&P) assets in CIS, Latin America and Africa, while consolidation in the E&P Independents space on the domestic side will be determining factors for M&A.

Trends that drove an increase in deal value, anchored on large transactions and consolidation across sectors, are expected to stay strong in 2017. Further, the coming year may witness a rise in stock deals between listed and private firms, largely to provide exit opportunities to shareholders, as there are a limited number of acquirers willing to evaluate all-cash deals. Further, it also helps manage value expectations between transacting shareholders. Overall, 2017 is expected to be a promising year for M&A.