Economic Highlights

New Delhi, 3 January 2014

                                                                    Indian Impasse

                                                               SLOWDOWN HITS M&A

                                                                   By Shivaji Sarkar

There is more bad news on the economic front. The slowdown has gravely impacted merger and acquisition activities of Indian companies. Barring a few big deals overall, it is a subdued affair even compared to the lacklustre 2012. The M&A hit a three-year low, with UK’s Grant Thornton stating there have been a total of 480 deals amounting to $27.4 billion during 2013 involving Indian companies. The momentum is not expected to pick up till mid -2014, when a new Government would be in place.

Slow economic activity, the volatile stock market and currency turmoil along with political uncertainty has brought down corporate expansion activities. An analysis of data compiled by various deal-tracking firms reveals that in 2012 Indian companies were involved in 598 M&A deals worth $35.4 billion, in 2011 there were 644 transactions worth $44.6 billion as against a whopping $ 67 billion activity in 2010.

One of the key trends that emerged in 2012 was the increase in domestic deals compared to cross-border M&As. The former’s value stood at US$ 9.7 billion, an increase of almost 50.9 per cent compared to 2011. In terms of deal count, the domestic deals were primarily seen in the financial service sector (23 per cent) and in 2012 these included the merger of Tech Mahindra with Satyam and the all-share merger of Sesa Goa and Sterlite Industries.

In 2013, the trend seemed to have continued. Notably, there are more inbound deals than outbound. Half of the pie of inbound takeovers is by bidders from the UK and the US. They acquired Indian assets, which were lucrative in a downturn. The foreign firms have placed their bets on India’s long-term consumer growth story. Besides, the market with weak regulators has been found easy to maneuver. Manipulation of consumer goods prices is much easier and profit-taking is considered easy. This apart, acquisitions are possible at the lowest prices. The global firms also see growth as political uncertainty is expected to end in the coming few months.

Outbound deals comprised of $9 billion with oil and gas being the most targeted sectors for cross-border acquisitions. Mergers and acquisitions stood at $6 billion. The most active sectors have been consumer, pharmaceuticals and healthcare. This trend was seen even in the previous year. In 2012, insofar as inbound investments were concerned, Japan emerged as the third largest major investor after the US and UK. However, in 2013 fewer deals were done by the Japanese companies.

Worse, the UN forecast – World Economic Situation and Prospects is skeptical about the growth in 2014. It says there could only be “expansion at subdued pace, lower growth prospects by 1.2 per cent to 5.3 per for 2014 and 4.8 per cent for 2013.” Despite improved global financial conditions and reduced short-term risks, the world economy continues to expand at a subdued pace. While global growth is expected to pick up to 3 per cent from the previous 2.1 per cent, for India there doesn’t seem to be much hope.

Several key risks and reservations remain, and, if not mitigated, could derail global growth again, as witnessed in the past few years. If these uncertainties remain then India is unlikely to become the engine of global growth. Thus, the corporate M&A is too likely to remain subdued, at least till July 2014.

Notably, in such adverse situations, there have been a few evident points. Though all of these activities were not exactly undertaken by fully Indian-controlled companies, technically these were clubbed to India’s growth, as the firms despite their large foreign ownership remain registered in India. What one saw was a $3.5 billion investment in Hindustan Unilever turning it into a fully foreign firm as the parent Unilever took over its Indian subsidiary.

Apparently, the Anglo-Dutch Unilever increased its stake from 52 per cent to 75 per cent in Hindustan Lever. In fact, India is the largest consumer for Unilever with 8 per cent of its sales and its products commanding a 40 per cent market share here--- larger than in any other market it operates in.

In 2014, Unilever is likely to increase its stake further by about $1.5 billion to further capture a larger share of the consumer market. This should be a concern for many other Indian consumer companies as it is eliminating competition in this segment. Despite a competition law and now also a competition regulator, the country has not seen it functioning the way it should. Undoubtedly, Unilever-type activities are a threat to the India growth story.

Another similar merger is by the US’ second largest generic drug company Mylan, with a $2 billion acquisition of Agila Speialities. The buy-out not only helps Mylan double its injectable medicines production, but it virtually becomes a leader in the segment. In other words, it becomes a monopolistic producer and will manage to have immense power to set the prices as it chooses. Obviously, the weak laws in India have helped it and this is likely to impact prices not only in the local market but also in the international market.

Then there is Qatar Foundation, controlled by Sheikha Mozha, second wife of Qatar’s Amir, which has acquired 5 per cent stake in Bharti Airtel, the world’s fourth biggest mobile phone company for $1.27 billion. This is a big gain for Airtel, which is known to attract marquee investors.

As regards the biggest Indian acquisition abroad, it was done by ONGC. The corporation took up 10 per cent stake for $2.6 billion-- said to be the second biggest and India’s largest cross-border transaction in 2013. The move is seen to help create energy security as it adds to reserves overseas in the backdrop of declining output from aging oil and gas fields at home.

The other major acquisition by ONGC is also in Mozambique. Along with Oil India it took over 10 per cent stake in a gas field from the Videocon group. The move is to augment energy reserves and bolster its profits. And let’s note that the ONGC has the highest profit margins among the public sector oil companies.  

While mergers and acquisitions are largely seen as an economic activity, these have a tremendous impact on the employees and competitive stakes. In most case, mergers lead to job losses at almost at all levels, including the management cadre as the trend is to have a slim workforce given that such companies save on their expenses. Thus, as competition increases, along with weak laws, monopolies rise at the cost of the consumers. Somehow, India is in a dilemma and hasn’t taken significant steps to ensure the market remains competitive. How soon will it have clarity? ---INFA