Markets cheer big M&A deals

Stocks getting hammered following big ticket acquisitions is now passe.

Investors are now cheering multi-billion takeover deals, shrugging off earlier concerns of stretched financials and huge debt burdens involved in funding takeovers on their balance sheets.

Compared to investors' sceptical view towards multi-billion acquisitions about three months' ago, this is a complete turnaround in the way stock markets are treating the news of big acquisitions.

For instance, stock prices of Vijay Mallya-promoted United Spirits, Tulsi Tanti-controlled Suzlon and Sun Pharmaceuticals have zoomed in recent days, after their respective announcements of mega overseas acquisitions.

Barely three months ago, market sentiment towards such mega acquisitions was just the opposite, leading to sharp falls in stock prices once the acquisitions were announced. Share prices of Tata Steel, Hindalco and Suzlon received massive hammering immediately after their multi-billion acquisitions. In fact, in Suzlon's case, the share price plunged after it announced $1.33 billion bid for Germany's REpower early this year. The counters lost close to 13-15 per cent in two to three days after such large deals.

Mega acquisitions, it was felt then, would result in huge debt burden on balance sheets of Indian acquirers and hence were perceived as investor-unfriendly.

Some analysts say markets are now viewing big-ticket acquisitions over a long-term perspective, but others believe the concerns are still valid though the prices have rallied in the last couple of months.

For instance, shares of Tata Steel slipped by about 15 per cent in a matter of days to the Rs 440 range immediately after its $12 billion acquisition of Anglo-Dutch steel maker Corus this January-end. From that level, its shares have rallied to the Rs 625 range on May 25, a handsome gain of 42 per cent from mid-February. "Nothing has changed (from mid-February). Tata Steel has rallied due to the steel cycle looking robust. The concerns of debt burden still matter," says Shankar Sharma of the brokerage firm First Global.

"In Suzlon's case, it looks like a relief rally," he said, pointing out that the Suzlon stock was lying low for sometime now by an "overhang" of bad news. The Pune company's stock has gained by 29 per cent to Rs 1,376 over the last two months. The share price of Sun Pharmaceuticals also rose by 4.5 per cent after the company said it was buying Israeli generic drug maker Taro for $454 million.

The only exception in the M&A stocks is Hindalco. Hindalco, which bought Canada's Novelis for $3.4 billion, is still at the Rs 149 range. The stock plunged from the Rs 172 level after the acquisition.

"Stock markets have realised the ultimate benefit to M&A companies over the long-term. Big institutional investors are changing the way they looked at big acquisitions," says Kunj Bansal of Religare Securities.

Recent days have seen shares of United Spirits rising by over 15 per cent after its $1.18 billion acquisition of Scottish spirits maker Whyte & Mackay. "The UB Group got Whyte & Mackay relatively cheap," points out Sharma, explaining the immediate stock price rally after the takeover. "We view this acquisition as more of a strategic fit and United Spirits was in need of such kind of acquisition to complete its product portfolio," wrote Rohan Gupta, an analyst with Emkay Stock & Shares, in a report on the company.