Despite the fall in deal volumes on both the merger and acquisition (M&A) and private equity (PE) fronts during the fourth quarter ending December, investment managers expect the improving global and domestic macro-economic indices to revive consumption and services-led growth, in turn leading to higher fund inflows into key sectors. Telecom, pharma, FMCG, healthcare, IT/ITES and educational services are expected to attract strong capital fund raises in 2010.
M&A, PE and qualified institutional placements (QIPs) deal volumes from January 1 to the period ending December 13 this year touched $21.20 billion (in 488 deals) as against $41.54 billion (766 deals) and $70.14 billion in 2008 and 2007 respectively, according to financial advisory ARC Financial Services. “I think deals follow with a lag. A lot of them will be in the pipeline currently, and in 2010 one should see an exponential jump in the M&A activity compared to 2009,” said Aviral Jain, senior consultant at valuation and transaction consulting firm American Appraisal Associates.
Research firm VCEdge said on Thursday that the long hiatus in deal-making, a challenging growth environment and drying of liquidity channels had led to PE deal value taking a 65 per cent knock in 2009 — deal volumes barely crossed $4 billion as compared with $11.96 billion in 2008. “The total number of PE deals fell 44 per cent from 502 in 2008 to 280 in 2009,” the firm said.
“We saw higher capital raises and investments in the pharma and FMCG spaces in the December quarter, which we expect to be the biggest grosser of the year,” said Tapan Jindal, head of financial and business advisory, ARC Financial Services.
“And, the inbound and domestic deals held their own against flagging investor sentiment in 2009, which we expect to continue into the first quarter of 2010,” Jindal said. He, however, added that M&A and PE investments in India had witnessed substantial value and volume declines compared with previous years, despite the revival in the second half of the year.
The average Indian M&A deal size in 2009 was $37.55 million, while the average Indian PE deal size was around $50.55 million. PE deals gathered pace post-September, though M&As took a knock thanks to the lack of investor confidence in the first eight months of 2009, which clipped down the total number of M&A deals.
“Private equity funding is often directly negotiated with the target company and materialises faster, while M&As are dependent on a number of stakeholders and ventures which often delays the fund release,” said Sudin Apte of tech research firm Forrester, as he attempted to explain the lower M&A volumes in 2009.
On an overall basis, M&A and PE activity in the technology sector was on the backfoot during the last ten months, barring exceptions like the Satyam buyout by Tech Mahindra and Infosys BPO's acquisition of US-based KPO McCamish Systems. “Still, the IT sector was more M&A focussed in 2009 than in 2008. We also saw many smaller BPO firms in India looking at exiting the business altogether. You can expect the promoters of more small BPO firms to exit their businesses in the first half of 2010,” said Manohar Atreya of o3 Capital, an investment advisory.
Into 2010, only a clear recovery in the manufacturing, retail and financial services sector will see capital raising picking up across sectors, says Sudin Apte. “Consumer spending is still flagging, and this has to rise for investor confidence on the technology front to be restored. Technology funding activity is likely to be low into the next two quarters,” Apte said.
Private equity and venture fund managers noted that the recessionary trends of 2009 would certainly not drive away investors in 2010. “They will explore the market, albeit with caution in selecting the industry to invest in. A recovery in consumption should further drive investors into sectors like manufacturing, FMCG and pharma in 2010,” said a consultant with a Bangalore-based business advisory.
While power, healthcare and infrastructure attracted their share of investments this year, telecom, education and the services sector are expected to dominate investor preference in 2010. Education, entertainment and social development sectors are also tipped to attract sizeable investments.
