Rising inflation, capital cost stall M&As: KPMG

Mergers and acquisitions (M&A) in the country has been hampered by rising inflation rates on the back of increasing oil prices and increased cost of capital following higher interest rates in the US, according to consultants KPMG.

The Indian market has seen a 8 per cent drop in M&A activity during the first half of 2004, with cross-border deals also taking a hit. The number of cross-border activity has practically halved in number to 49 against 83 in the corresponding period of 2003, with the value coming down to $ 1.32 billion during the period.

Just 109 M&A deals took place in the first half of calendar 2004, indicating a slow down of 8 per cent against the corresponding period in 2003, according to KPMG.

The report further indicates that M&A activity in the second half of 2004 mainly hinges on market, geo-political and economic factors "" many of which currently threaten to hold back growth. There has been no real recovery in global M&A activity though it has been leveling out, with the Asia Pacific region being the first to show growth.

"These figures are below expectations given the optimism that surrounded the first quarter. At the start of the year, a more stable economic landscape and a rebound in the equity markets held the promise of increased M&A activity, but this is yet to materialise," Ian Gomes, country managing director""India of KPMG said.

The drop in overall number of deals indicate that recovery is still a way off.

The report shows a levelling out in global M&A activity witnessed since 2000, while the Asia-Pacific region marked an upward trend, Gomes added.

Hewlett Packard's buy out of Digital Globalsoft valued at of $378 million was the biggest deal followed by the combined entity's acquisition of HP India's software business. In telecom, the major deals included Reliance's acquisition of UK-based Flag Telecom, Idea Cellular's purchase of' Escotel and Bharti's acquisition of Hexacom.

According to the study, in the first half of 2003, M&A activities concentrated mainly in chemicals with 36 per cent, followed by telecom at 17 per cent, logistics at 14 per cent and oil and gas at 13 per cent. Globally, 8,073 deals were struck, of which $557 billion worth transactions were closed this half.

Outbound investment activity continued to be led by oil and gas PSUs, IT and pharmaceutical majors. Increased inbound investment activity in food and beverages sector was witnessed with Warburg Pincus investing in Radhakrishna Foods, Nestle increasing its stake in its Indian subsidiary, Schreiber USA's acquisition of a significant stake in Dynamix Dairy, Lotte Confectionery (Korea) acquiring Parrys Confectionery and Nichirei of Japan acquiring a stake in Snowman Frozen Foods.

Carlton Pereira, managing director, KPMG India said, "The fate of final figures for 2004 would depend on the large backlog of pending transactions. Also, he current mood of the market was subdued after experiencing a series of shocks over the last two years and the harsh spotlight of the regulator and the focus on corporate governance have also put brakes on deal making."

"Everything now hinges on confidence outweighing uncertainty. In India, confidence also depends largely on the change of guard after the recent elections," Pereira added.

The worldwide analysis reveals that the value of global completed transactions held up with a combined $557 billion worth of deal activity for 2004 to date compared with $553 billion of deals closed during the first half of 2003.

However, the number of completed deals was down 10 per cent from 8,942 in the first half of 2003 to 8,073 so far this year. The value and volume of activity for this half year is also below that for the second half of 2003.