Mergers & Acquisitions may slow down in the second half

 

 

PwC has predicted that mergers and acquisitions worldwide in the mining sector are bound to slowdown in the second half of the year due to jittery markets. Global equity markets are melting down due to economic slowdown and will put downward pressure on most of the mining companies’ valuations for the near term. The statement is true not only for mining companies, but for all companies in all sectors. The deal values have declined by 32% in July and 25% in August this year. In the first half of 2011, 1379 deals amounting to $71 billion were announced. This was an increase of 24% in volume and 2% by value over the corresponding period of the previous year. The average deal values during the first half of 2011 increased by 40% over the corresponding period of the previous year to $104 million. US companies accounted for 31% of the value and led the M&A market. It was followed by Canada with 19%, China 7% and India less than one per cent. Deals involving minerals like coking coal and iron ore made up over 30% of the transactions in the first half of 2011. Coal topped gold as the most sought after resource by aggregate deal value.

 

 

E&Y valued global tech M&As in April-June 2011 at $52 billion. It was nearly double the deal value over the first quarter. It was 69% higher than the figure of $30.8 billion in the corresponding period of the previous year. The increase was powered by innovation in areas such as cloud computing, smart mobility, Internet and mobile video, the smart grid and solar energy. Top ten deals accounted for 61% of all disclosed value. E&Y has predicted that this year will continue to be a strong year for technology M&As but has cautioned against geopolitical unrest, global debt issues and other factors.

 

 

In India, the new takeover code introduced by SEBI is its way of pushing India Inc to the international arena in the M&A space. The new takeover code of SEBI more or less conforms to global practices. For example, the initial threshold limit for the acquirer has been raised from 15% to 25% of the voting capital of the target company. In fact, in other countries like Britain, Singapore, Hong Kong and EU, the limit is still higher at 30%-35%. With the new guidelines in force, the M&As landscape in India is bound to change and may witness increased activity. But there are still issues to tackle. The word ‘control’ may remain a sticky issue in M&As. SEBI has stuck to the definition of control despite takeover committee’s advice.

 

 

In India, IT, microfinance and real estate sectors form 52% of M&As in June-July. There were 68 deals in this period. International deals contributed 54.4% of M&A activity while domestic market accounted for 20.6%. Percentage of foreign companies that acquired Indian firms comprised only 7.4% of the total activity. IT sector witnessed the maximum of 18 deals. In the real estate sector, five international deals were signed in the US. Important deals were EXL Service Holdings acquiring Outsource Partners, Northern Trust acquiring Bank of Ireland Securities Services and IDBI acquiring Universal Commodity Exchange, Vodafone acquiring 22% stake in Essar Communications for $3.32 billion and ICICI            acquiring a stake in GTL.

 

 

In the international level, the majority of the deals struck in the first half of the year have been by strategic buyers looking to augment existing businesses. Johnson & Johnson acquired Synthes for $20.8 billion to expand its presence in the increasingly lucrative medical devices sector. Only cash rich companies can afford such an acquisition. Johnson & Johnson has low debt and $28 billion in cash. In the investor interest, experts are urging for disclosure of M&A value. But some others say that such strategic information must be shared at a later stage to avoid competitors preying. Recently Reliance group acquired 74% stake in Bharti AXA Life Insurance and Bharti AXA General Insurance. But it did not disclose the deal value. Hero Honda also did not make public the deal value when its Japanese partner Honda exited from the venture.

 

 

SEBI’s endeavour was to guard against monopoly. The principle behind the move is right. But the problem is that it should not get stuck in bureaucratic delays. The 180-day limit set by the CCI to evaluate such M&A cases is too long and time consuming.