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India Inc takes Cue from Global Economy, Goes Slow on M&A in 2nd Quarter

The global slowdown and absence of big ticket overseas acquisitions by India Inc have led to a sharp decline in the merger and acquisition activities by domestic firms in international market during the second quarter, compared to Q1 of this fiscal, an ASSOCHAM Eco Pulse (AEP) Study has shown.

In a Study on `M&A in 2nd Quarter of 2007-08’, it has been highlighted that the value of M&A deals struck abroad by the Indian companies have gone down by 64 per cent from $10.3 billion in first quarter to $3.6 billion in the second quarter of current fiscal with Europe recording the biggest drop of 88 per cent. However, thanks to the M&A activities continuing in the IT and ITeS space, the US has reported almost the same level of deals incurred by the Indian firms as the previous quarter.

While the Indian buy-outs of US companies were recorded at $2.9 billion in second quarter and $2.95 billion in first quarter, the major setback took place in European region. M&A deals announced by Indian firms in Europe fell from $2.8 billion in Q1 to $326 million in Q2.

“The M&As by Indian firms follow the global trend showing a slowdown in these activities. According to a recent report in the Financial Times, the overall merger deals in the international market have recorded 42 per cent fall during July-September period”, said Mr. Venugopal Dhoot, President, ASSOCHAM.

The AEP has been monitoring M&A deals since April this year quarter by quarter. It tracked a total of 65 deals in Q1 and 60 in Q2 across a wide range of sectors including IT and ITes, hospitality, steel, communications, infrastructure, textile, telecom and financial services. The Study is based on the announcements made by the companies.

In terms of sector analysis, while ‘Steel’ ruled the roost owing to Tata-Corus deal in the first quarter, IT and ITes dominated the M&As for Q2 valued at $1.56 billion. While the steel sector had M&A valuation of $5.4 billion between April and June, it dropped to a mere $940 million between July and September.

The Second quarter witnessed financial turbulence in the US economy triggered by the sub-prime crisis resulted by weakening of housing markets. The slowdown indicators appeared in the European economy as well with housing market defaults and rising unemployment rate reported in UK. Tightening of credit markets made the leveraged deals difficult for Indian companies. Despite cooling in the US economy, it was the IT and ITes which saved the day providing a piggyback to global ambitions of India Inc.

The inorganic expansion activity cooled down at the domestic front also. Absence of the blue chips from the M&A market led to a decline of 40 per cent in the valuations even as the number of deals struck remained almost same in both the quarters. Lack of corporate enthusiasm for the buy-outs may turn out to be an adverse signal for economic growth of India, Mr. Dhoot added.

As compared to $2.63 billion worth deals cracked within the Indian corporate sector of India in first three months, the amount squeezed to $1.55 billion in following three months of Q2 of FY2007-08.

On the contrary, the foreign firms remained bullish on India, as they splurged their acquisition valuations by 25 per cent from $153 million in first quarter to $193 million in the second quarter.

The total deal values across Indian and foreign companies have registered a decline of 58 per cent from $13 billion in first quarter of current fiscal to $5.4 billion in second quarter.

The biggest acquisition announcement was made by JSW Steel to take over Jindal United Steel Corporation, Saw Pipes and Jindal Enterprises LLC based in US for $940 million. India Hotel Company was the second biggest acquirer with the deal value worth $850 million. The other major acquirers in the second quarter were Wipro Technologies ($ 600 million), Firstsource Solutions ($330 million) and Reliance Communication ($300 million).

While energy, auto, pharma and liquor sectors dominated the mergers and acquisitions space in the first quarter of the current fiscal, the subsequent quarter was marked by the absence of any consolidation activity in these sectors. On the other hand, hospitality, communication, infrastructure, petroleum, healthcare and entertainment industries witnessed considerable corporate expansion through merger route.

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