Barclays Capital rose to one of the top three positions in the mergers and acquisitions (M&As) space in India since Frank Hancock took charge. Hancock joined Barclays Capital as managing director and head of M&As, India, in August 2008 after a 10-year stint with ABN AMRO. He has advised India’s largest outbound M&A transactions, including Tata's $12-billion acquisition of Corus Plc. In an interview with Reghu Balakrishnan, he talks about the future trends and challenges for the M&A sector in India. Edited excerpts:
What are the prospects of M&As, both in 2011 and in the future?
In 2011 so far, deals worth $25 billion have been announced, compared with deals worth $36 billion in the same period of 2010 ($100 billion for the whole year). Compared to the last year, there has been a marked slowdown in M&As this year due to numerous domestic and global headwinds that businesses face in their operating environment. But, while the first half of 2011 has been slow, we feel the deal activity should pick up in the second half. So, the year as a whole, should not finish too far behind 2010, which was the best year for M&As.
What are the key trends of 2011?
In terms of key trends for the future, we are about to witness a fundamental shift in the balance between outbound and inbound transactions in favour of inbound deals. The key drivers for this change are the continuing growth of sponsor activity, which is finally having an impact in terms of creating a buyout culture among Indian promoters, and the emergence of corporate restructuring as a major theme (major business houses are refocusing their businesses and beginning to dispose of non-core assets).
As evidence of the former trend, we have seen two large sponsor buyouts so far this year — Apax-Patni, Bain Capital-Hero, and a sellout by a sponsor controlled entity — Serco Intelenet. In terms of the latter trend we may see a number of corporate disposals by India’s leading conglomerates.
What sort of headwinds does the M&A market face and when would these subside?
The key domestic headwinds are inflation and concerns about governance, while the key international headwinds are concerns about global growth and the stability of the euro. Businesses are waiting for evidence of progress on both fronts before transacting. They would see this evidence during the second half, and as a result, the pace of deals should pick up again.
What has been the long-term impact of the credit crunch and the global slowdown on lending for M&As?
The years 2008 and 2009 were tough for Indian businesses. While public sector banks and a few foreign banks remained open to clients, there was a serious liquidity squeeze across corporate India. One result of this liquidity squeeze is the number of businesses with access to bank funding for M&As has been reduced. Banks have become much more conservative in their credit evaluations.
Another long-term impact of the credit crunch has been the increasing trend of large businesses seeking balance sheet support and advice on M&As from their banks. This trend is worrying banks which offer advice alone under pressure. It is also strengthening the competitive position of banks that provide end-to-end services to their clients.
Would access to funds remain difficult for mid-sized firms in the future?
We believe India's top conglomerates like Tata, Reliance, Vedanta, and Bharti would continue to enjoy access to credit markets for acquisitions, while tier II businesses would find the going much tougher. Examples of the former in 2010 include Bharti's $7.5-billion financing to support its $10.7-billion acquisition of Zain’s African operations and Vedanta’s $5-billion funding to support its announced $9.6-billion purchase of Cairn India.