Acquiring confidence

India has become a global hot spot for mergers and acquisitions. The number of M&A deals in India in the first half of 2005 increased by a huge 80 per cent compared to a rise of 5.40 per cent globally.

Of course, the absolute numbers for India are still well below those of comparable countries""for instance, India had a total of 189 M&A deals in the first half, far fewer than China's 686. Deal sizes too are smaller, and volume growth in Indian M&As lagged behind the global average. But these reservations should not detract from the fact that M&A activity in the country is expanding at a frenetic pace.

Globalisation has been one major reason for the spurt in M&A activity, and the traffic has been two-way. For example, according to an Assocham study, Indian companies acquired 26 overseas firms and foreign companies took over 20 Indian firms in the first quarter of FY 06.

Foreign companies are buying Indian companies as part of their strategy to buy into the rapidly growing Indian market, and taking over local firms, with their readymade distribution networks and relationships, is an attractive solution. In many industries, India is also viewed as a low-cost manufacturing or servicing or even a research base, and local companies that can offer quality are targets.

On the other hand, Indian companies are keen on acquiring a global footprint to explore new markets, and taking over overseas firms helps achieve that objective. Yet another objective of M&A deals has been the need to secure access to increasingly expensive raw materials""partnerships in oil exploration are the most obvious examples. As the country becomes integrated into the global economy, we should see even more of such acquisitions by Indian companies.

Interestingly, M&A activity is not limited to any particular sector. To be sure, the IT and BPO sectors account for a fifth of all M&A deals, but other sectors are not far behind, with finance and pharmaceuticals being major areas. Nor are cross-border deals the only M&A activity""local mergers and buyouts, aimed at gaining market share, have also been plentiful.

As a matter of fact, consolidation among domestic firms aimed at consolidation in an industry is a win-win for all firms in the industry, as it not only removes the threat of undercutting by weaker players, but also gives local companies the size required to take on global competition.

Moreover, corporate balance sheets are awash with cash, while market valuations too are buoyant""both ideal conditions for M&A deals. M&As are being encouraged in the public sector also""for example, the government has been openly advocating consolidation in banking to improve the health of the financial system.

In short, as the economy goes down the path of liberalisation and globalisation, we can expect to see a rapid increase in M&A activity. The rise in the number of deals is the best illustration of how far India Inc has travelled from the protectionist mindset of a decade and a half ago.