Mergers and Acquisitions in India – Mergers and acquisitions as we know imply alliance of two or more companies future. Where a merger leads to formation of a new company, acquisition leads to purchase of a company by other and no new company is formed.
India in recent past has seen great potential in case of Merger and Acquisition (M&A) deals. It is being played vigorously in many industrial sectors of the economy. Many Indian companies have been growing the inorganic way to gain access to new markets and many foreign companies are targeting Indian companies for their growth and expansion. It has been spreading far and wide through various verticals on all business platforms.
The volume of M&A deals has been trending upwards particularly in the fields of pharmaceuticals, FMCG, finance, telecom, automotive and metals. Various factors which lead to this robust growth of mergers and acquisitions in India were liberalization, favorable government policies, economic reforms, need for investment, and dynamic attitude of Indian corporations. Almost all sectors have been opened up for the foreign investors in different degrees which has attracted this market and enabled industries to grow.
History of Merger and Acquisitions in India
However after independence, during the initial years, very few corporations came together and when they did it was a friendly negotiated deal. The reason behind less number of companied involved in mergers and acquisitions were due to the provisions of MRTP act,1969 wherein such a firm had to follow a pressurized procedure to get approval for the same which acted as a deterrent.
Although this doesn’t mean that mergers and acquisitions in India were uncommon during this controlled system. In fact there were cases where the government encouraged mergers to revive the sick units. Additionally the creation of Life Insurance Corporation (LIC) and nationalization of life insurance business resulted in takeover of 243 insurance companies in the year 1956.
The concept of mergers and acquisitions in India was not very popular until the year 1988. This year saw an unfriendly takeover by Swaraj Paul to overtake DCM ltd. which later had turned out to be ineffective.
After the economic reforms that took place in the 1991, there were huge challenges in front of Indian industries both nationally as well as internationally. The intense competition compelled the Indian companies to opt for M&A’s which later on became a vital option for them to expand horizontally and vertically. Indian corporate enterprises started refocusing in the lines of core competence, market share, global competitiveness and consolidation.
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The early nineties saw M&A transactions led by Indian IT and pharmaceutical firms primarily to place themselves near to their major clients in other developed economies and also break into new markets for expansion.
In this backdrop, Indian corporate enterprises undertook restructuring exercises primarily through M&A’s to create a formidable presence and expand in their core areas of interest. Since then there has been no looking back and India is being considered one of the top countries entering merger and acquisitions. However, the complications involved in the acquisition process has also increased caused by evolving legal frameworks, funding concerns and competition norms which pose a constraint for the deal to be successful.
Drivers of Merger and Acquisitions in India
- Right to entry: Acquisitions that take place abroad permit Indian companies to gain access to developed markets across the globe.
- Technology transfer: This is one of the main advantages and drivers that urge companies to get into M&A deals. Many times corporations require technologies to manufacture particular product or a service which is not available in India. In such situations by acquiring/collaborating companies abroad they get access to the technologies.
- New Product Mix: Many times it is not profitable for companies to manufacture products themselves either due to cost constraints or requirement of huge investments. In such a scenario alliance with another company can give them the right to sell and diversify their product range.
- Hedging Country Risks: Merger and Acquisitions are also attempted to reduce the reliance on the Indian markets and escape the local business cycles.
Recent trends of Mergers and Acquisitions in India
There are various factors that facilitate mergers and acquisitions in India. Government policies, resilience in economy, liquidity in the corporate sector, and vigorous attitudes of the Indian businessmen are the key factors behind the fluctuating trends of mergers and acquisitions in India.
Considering the trends in previous years, Year 2012 saw a slowdown in mergers and acquisitions in India. It hit a three year low down by almost 61% from its preceding year. This was majorly caused by the tough macro-economic climate created due to euro zone crisis and other domestic reasons such as inflation, fiscal deficit, and currency depreciation. However that year also saw a key trend that emerged and it was the increase in domestic deals compared to cross border M&As. The domestic agreement value stood at USD 9.7 billion, up by almost 50.9% in comparison with 2011.
This year 2014, has started off on a positive note for inbound M&A deals in India which has so far seen 15 deals in the first two months. The general elections due in the coming months would have a huge impact on the on the mergers and acquisitions in India. Though the investment sentiments have improved the foreign companies are awaiting the effect of elections before putting in money in India.
The country is strong enough in its rudiments which will drive its business and economic growth.
With the increase in number of M&A deals in India, the legal environment is increasingly becoming more and more refined. M&A forms a major part of the economic transactions that take place in the Indian economy. There are a few challenges with mergers and acquisitions in India which have been discussed below;
Regulatory Ambiguity: M&A laws and regulations are still developing and trying to catch up with the global M&A scenario. However because of these reasons the interpretation of these laws sometimes goes for a toss since there is ambiguity in understanding them.
Several regulators interpreting the same concept differently increase confusion in the minds of foreign investors. This adversely affects the deal certainty which needs to be resolved if the Indian system wants to attract investments from foreign economies.
Legal Developments: There have been consistently new legal developments such as the Competition Act, 2002 , the restored SEBI Takeover Regulations in 2011 and also the notification of limited sections of the new Companies Act, 2013, has led to issues in India relating to their interpretations and effect on the deals valuations and process.
Shareholder Involvement: Institutional investors in the minority position have become active in observing the investee companies. Proxy advisory companies are closely scrutinizing the related party transactions, appointment of several executives and their remuneration. There are cases where the approval of minority shareholders is required. The powers to the minority shareholders have been revamped, one of them includes to sue company against oppression and mismanagement.
These are some of the issues that pose a challenge towards the growth of mergers and acquisitions in India which need considerate attention from the government to make our market attractive for foreign investment.
On a positive note Confederation of Indian Industry (CII), the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) – the three main regulators of the mergers and acquisition activities – have been striving hard to further liberalize the norms that have been one of the biggest contributors to the country’s industrial expansion.
Major Mergers and Acquisitions in India
- Bharti Airtel acquired Kuwait based Zain Telecom’s African business for USD 10.7 billion which was considered the largest ever cross-border deal in an emerging market.
- Considered to be the biggest deal in the Pharmaceutical sector was the acquisition of the generic drug unit of Piramal Health care by USA based Abbot Laboratories (ABT) for USD 3720 million.
- In the Banking, Financial Services and Insurance sector, biggest deal was by Hinduja group, when it acquired Luxembourg based KBL European private bankers SA for USD 1.69 billion.
- Tata Chemicals took over British salt based in UK with a deal of US $ 13 billion. This is one of the most successful recent mergers and acquisitions 2010 that made Tata even more powerful with a strong access to British Salt’s facilities that are known to produce about 800,000 tons of pure white salt annually.
- Merger of Reliance Power and Reliance Natural Resources in a deal of US $11 billion is another biggest deal in the Indian industry. This merger enabled convenience Reliance power to handle all its power projects as it now enjoys easy accessibility of natural gas.
- In domestic mergers ICICI Bank’s acquisition of Bank of Rajasthan at about Rs 3000 Crore was a great move by ICICI to enhance its market share across the Indian boundaries especially in northern and western regions.
- Tata steel’s takeover on Corus in 2007 is considered to be the largest Indian take over whose deal value was worth $7.6 billion which also made Tata’s the fifth largest steel company.
- Vodafone has acquired a 52% interest in Hutchison Essar from the Hong Kong based Hutchison telecommunications International for about US$10.83 billion.
- Imperial energy India’s biggest exploration company Oil and Natural Gas Corporation (ONGC), bought Imperial Energy Plc for $2.58 billion to tap Siberian deposits and make up for diminishing output at home.
- Aditya Birla Group’s Hindalco Industries, India’s largest non-ferrous metals company, acquired the Canada based firm Novalis in an all-cash transaction for $6 billion.
- In 2008, Tata acquired Britain’s most famous automobile manufacturers Jaguar and Land Rover, in a $2.3 billion contract with Ford, their American owners.
- Subhash Chandra’s Essel Packaging (EPL) acquired the Swiss tube packaging major Propack, to become the world’s largest in laminated tubes.
- In 2006, Ranbaxy Laboratories(RLL) created news when it announced the acquisition of 3 drug-makers in Europe, all within a week’s time. Allen S.p.A, a division of GlaxoSmithKline (GSK) in Italy, Romania’s largest independent generic drug producer Terapia and drug maker Ethimed NV in Belgium.
- In 2007, Pharmaceutical and biotechnology major Wockhardt bought the fourth largest independent, integrated pharmaceutical group in France, Negma Laboratories. At a deal of $265 million, Wockhardt became the largest Indian pharmaceutical company in Europe with more than 1500 employees based in the continent.
- In 2008 Bennett Coleman & Co, India’s largest media group and the holding company of the Times of India group, bought Virgin Radio in the UK in a $53.2 million deal with SMG Plc.
- Mahindra & Mahindra acquired 90 percent of Schoneweiss, a leading company in the forging sector in Germany. The deal took place in 2007, and consolidated Mahindra’s position in the global market.
- Sterlite Industries, a part of the Vedanta Group in the year 2008 signed an agreement regarding the acquisition of copper mining company Asarco for $ 2.6 billion.
India is becoming a highly sought after destination for M&A deals. This also means that it is now more vulnerable to the impulses and uncertainties of the global economic scenario. Considered to be the lifeblood of Indian business now, it needs the support and constancy to ensure that it remains progressive in the coming years.
India must concentrate upon refining the processes, increasing the simplicity in doing business abroad and the legalities involved in them. It is not wrong to say that the mergers and acquisitions in India and the system related to that are in the infant stage but this economy is huge enough to provide opportunities to foreign investments.
The key to success keeping fundamentals in place i.e. to bring into line acquisitions to the entire business strategy, plan and execute a vigorous integration process and take adequate awareness of all relevant regulatory norms.
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