UBS, the Swiss investment bank, inked a number of deals across sectors in merger and acquisition (M&A) and private equity (PE) space and marked a strong presence in 2010. In the largest M&A deal of 2010, UBS advised Zain Telecom in its $10-billion African business sell out to Bharti. It also advised Reliance Industries for its $3-billion joint venture with Pioneer Natural Resources and Newpek. Ganeshan Murugaiyan, an MBA from the Indian Institute of Management, Calcutta, joined as head of UBS Investment Bank in 2006 after a 10-year stint at Merrill Lynch. He was involved in key transactions, including Vodafone’s $13-billion acquisition of Hutch and $900-million dual follow-on offerings by Unitech. Ganeshan spoke to Reghu Balakrishnan on the trends and deal models of 2011. Edited excerpts:
2010 was tough for the PE industry for concluding deals. Was valuation the major concern?
For M&A and PE deals, valuation is only one aspect. Any deal takes time to conclude, as a lot of factors such as legal agreement, clauses that buyer or seller may not agree with, other softer issues like non-compete clause and issues of large client exposure in case of a services company, delay the procedure. Surely, 2011 will witness more exits as in 2010, as investors are looking to get the money back. Though the valuation expectation has been high, strategic investors are willing to pay high price in some cases, which will continue in 2011.
Some deals never get concluded and talks continue..
For both buyer and seller, there is no benefit in delaying a deal. Buyers have to invest a lot of time and money in due diligence and evaluating deals. Even from a company’s perspective, such situation creates uncertainty, affecting productivity among employees. Any M&A deal ends up creating an uncertainty for the system. Hence, no company wants to keep the talks for a long time, though the seller want to get maximum out of the deal.
Abbott-Piramal deal was the most discussed M&A deal in 2010. Will there be any deal of such ‘un-believable’ valuation in 2011?
I would not comment on any specific deal, but in several cases, there are various other aspects to evaluate in addition to the current revenue and multiples. The Indian market is in mode of consolidation and large global players would want to be in the top league. Acquisition of a large player gives them access to a platform from which they can grow their business significantly in four-five years. Once you include the attendant benefits of the platform to the buyer, the valuation might be reasonable. For example, none of the global players have a large presence in the Indian pharmaceuticals market as the market is highly fragmented. The market continues to be attractive in the growth context, making it one of the markets you need to have a presence in. Therefore, building up scale ahead of potential consolidation in the market can help in creating significant value. The sectors where multinational companies want to create strong presence will see more blockbuster deals in 2011.
Which are the high potential sectors for M&As in 2011?
For inbound deals, there is a lot of interest in consumption driven sectors such as fast moving consumer goods and retail, though foreign direct investment guidelines prevent investments in some sectors. The financial service sector has high potential. Pharma is another one. For outbound M&As, commodity, energy and resources will be the key sectors in term of size. However, a good number of deals in telecom and information technology sectors are bound to happen in 2011. The better balance sheets and stable outlook for the growth story of Indian corporates will push for large outbound deals in 2011.
What are the new geographies to watch out in 2011?
Africa and Indonesia will continue to be hot areas for commodities such as coal and metals, while Europe will attract Indian investments for industrial and pharmaceutical sectors. Latin America will continue to be in the picture across sectors, especially in resources, renewable energy and infrastructure. The US will see acquisitions by Indian companies in chemicals and energy. Though people stayed away from the US market during the last one-two years, its economic stabilisation will generate confidence to see investments from India this year.
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Will fundraising for India Inc be easier in 2011?
It will depend on fundamentals within sectors. Within sectors, selected companies will be able to raise money. Not every company can raise money, as track record and fundamentally strong equity story will be the key element investors will focus on.
What about PE fundraising?
Limited partners want to increase their exposure to emerging markets like India. Always, the investment-exit track record of general partners will be the criterion. For new persons without a track record, fundraising from offshore markets seems difficult this year. Domestic market is still not a large enough market to raise a meaningful size. Also, to raise funds from the domestic market, backing of a corporate with a well known brand name is important.
For PE players, what would be the preferred exit route in 2011?
There have been few examples of exit through strategic route. M&A is one of the preferred route, which helps complete exit. However, given that most of the PE investments in India are minority stakes as opposed to buyout situations, PE players have limited say in terms of exit through the M&A route. Secondary sale to another PE firm is always an option. In initial public offerings , though the returns are high, PE investors cannot sell their entire stake and also, there is the one year lock-in period after the IPO.