The two main driving motivations are access to new markets and entry into new product lines
Merger and acquisition (M&A) activity involving Indian small and medium enterprises (SMEs) are on the rise. During the first two months of 2010 M&A transactions worth $155 million (around Rs 713 crore) have been concluded in the SME sector, up by 66 per cent over the $93 million (around Rs 427.8 crore) in transactions in the corresponding period of 2009.
Private equity (PE) investment, which has been the key for acquisitions, also witnessed a 121 per cent increase during this period.
According to Venture Intelligence, a Chennai-based research firm focusing on M&A and PE transactions, there were 22 M&A deals in January-February 2010, compared to 16 deals during the corresponding period of last year — an increase of 55 per cent.
The research firm has included all unlisted companies and listed companies with a market capital of less than Rs 500 crore. All inbound transactions have also been excluded.
Some of the major M&A transactions of January-February 2010 include Dorf Ketal Chemicals’ acquisition of DuPont Chemicals and Fluoro Products (sale of assets) for $40 million (around Rs 184 crore) in January, followed by Greenko Group’s acquisition of Hemavathy Power Project for $33 million (around Rs 151.8 crore).
This was followed by VLCC’s acquisition of The Grooming Company for $32 million (around Rs 147.2 crore); Air Works India Engineering’s acquisition of Air Livery for $20 million (around Rs 92 crore); and Advanta India’s acquisition of Crosbyon Seed Company for $13 million (around Rs 59.8 crore).
Top M&A transactions of January-February 2009 include Nuziveedu Seeds’ acquisition of Yaaganti Seeds for $51 million (about Rs 234.6 crore); followed by Cosmo Films’ $17 million acquisition of GBC Commercial Print Finishing; INX Media’s acquisition by Indi Media for $10 million (around Rs 46 crore); the acquisition of Dagger Forst Tools by the Samvardhana Motherson Group for $9 million (around Rs 41.4 crore); and the acquisition of Nippon Express India by Nippon Express Company for $6 million (around Rs 27.6 crore).
What sets this wave of M&A deals apart from those of the past is that previous deals tended towards the expansion of production capacity, while this time the two main driving motivations are access to new markets and entry into new product lines, said industry observers.
For instance, in February Elgi Equipments Ltd (EEL), a Coimbatore-based manufacturer of industrial compressors, acquired Belair SA France, which is engaged in the assembly, sales and service of industrial compressors, piping, fittings and accessories. The acquisition was valued at euro 700,000 (around Rs 4.3 crore).
Jairam Varadaraj, managing director of EEL, said that the company follows a model of “multi- local” acquisition of small-to-medium companies with strong brand names and supports them with the ‘Elgi Inside’ strategy of providing key technologies and product extensions.
“In line with this strategy, we have purchased a 100 per cent shareholding in Belair SA, which supplies compressors to the industrial segment with about 3 per cent of the French market,” he added. Belair’s sales are euro 6.5 million (around Rs 40.3 crore) per year.
M&As have also been driven by the need for access to capacity and new products. SMEs, mainly manufacturers, are showing interest in acquiring factories in Europe, which would give them access to machinery and equipment.
“The recent downturn hit SMEs in Europe, and they are looking for buyers,” said S Murugan, a textile exporter from Tirupur, who is negotiating with two European manufacturers to acquire their assets.
“We are also looking for good acquisition opportunities for capacity enhancement, which a capacity of 1,500 tonnes per month to the company,” said T Pavithra, director, Pioneer Alloy Castings, which is planning to increase its capacity three-fold to 120,000 tonnes per annum with an investment of around Rs 150 crore.
Another example is EdServ, a Chennai-based education and placement company, which has acquired SmartLearn WebTV for Rs 4.6 crore. It also acquired Hyderabad-based SchoolMATE, a CRM and ERP software solution provider to schools, for Rs 4 crore.
“This acquisition will help the company to go pan-India and will give us access to new product lines,” said S Giridharan, chairman and chief executive.
The company has got approval from its board to raise up to Rs 130 crore through the issue of equity shares through the QIP (Qualified Institutional Placement) route, which will be used for further acquisitions, he added.
The wave of M&A activity also reflects increasing strategic clarity. “M&As can be used to get a handle on new opportunities and new trends, and not just for expanding existing production capacities,” said a PE fund representative.
PE is a key source of funding for M&As. PE firms have begun exploring growth opportunities in the West for Indian SMEs in their portfolios, helping them to make overseas acquisitions that can benefit these small firms in the long run. Such PE fund companies include KKR India Advisors Pvt. Ltd, Bain Capital Advisors (India) Pvt. Ltd and Carlyle India Advisors Pvt. Ltd.
PE fund managers are of the opinion that entering into cross-border deals and diluting equity to help Indian SMEs acquire assets abroad will not only increase the company’s value, but also enable PE fund companies to get a higher return at the time of exit.
This had boosted PE investments to $126 million in January-February 2010 from $57 million in the year-ago period. However, the number of deals dropped to nine from 13 during the same period.
Major investments include $45 million by TA Associates in Micromax; $21 million by DAR Capital in Valuable Media; $15 million by a consortium of SVB, DFJ, Canaan Partners and SAP Ventures in iYogi; $12 million by Helion Ventures, Charles River Ventures and Globespan Capital Partners in SMS GupShup; and $10 million by Asiabridge in Alok H&A Textiles.
