Reforms boost M&A landscape in India in 2017

The Indian corporate sector witnessed a healthy increase in merger and acquisition (M&A) activities in 2017, vis-a-vis earlier years, as companies adopted an inorganic route to growth, largely aimed at business consolidation, expansion of market share, entry into new markets and enhancement of product lines. The positive sentiment was in a large measure due to a supportive economic environment, including easier credit availability and diminishing regulatory barriers. The government’s focus on reforms along with resilient capital markets is seen as highly conducive to stimulate investments and encourage corporates to actively plan their acquisition strategy. 

Rising volume of M&A activities

The Global Transactions Forecast by Baker McKenzie, a multinational law firm, estimates the valuation of 2017 M&A transactions in India at about US$46.5 billion (US$13.1 billion domestic and US$33.4 billion cross-border) through 944 deals (664 domestic and 280 cross-border). This represents a 165 per cent increase in valuation and a 70 per cent jump in deal volume over 2016, which witnessed 553 transactions (358 domestic and 195 cross-border) worth US$17.5 billion (US$7.2 billion domestic and US$10.3 billion cross border). 

According to EY, a multinational professional services firm, 2017 recorded 1,011 deals with a disclosed valuation of about US$41 billion, resulting from strong foreign buying interest and consolidation underway across sectors including telecom, cement and energy. However, EY Transactions 2017 report puts the value of M&A deals in 2016 at US$48.5 billion from 867 deals, which is at a considerable variance from the Baker McKenzie estimates. Another estimate released by Grant Thornton, puts the M&A activity during January-November 2017, at 389 deals worth US$39.9 billion. 

Notwithstanding the varying estimates by different agencies, it is clear that the Indian corporate sector continued to witness vigorous M&A activity in India in 2017. While Russia-based Rosneft PJSC’s US$13 billion takeover of Essar Oil and the US$11 billion merger of UK-based Vodafone’s India subsidiary and Idea Cellular were the big ticket M&A deals of 2017, the M&A landscape in 2017 was not about mega deals alone.

M&A deals eye up-and-coming sectors

The startup ecosystem also witnessed 133 deals during the year as per Inc 24 Media – Indian Tech Startup Funding Report 2018, with Flipkart’s acquisition of eBay India in April 2017 being one of the most talked about acquisitions in the startup space. Of the total startup M&As reported in 2017 (about 14 per cent lower than 2016 with 155 deals), nearly two-thirds were acquisitions and only 3 per cent were merger deals. The remaining 32 per cent were acqui-hires.

There has been a quantum leap in M&A transactions in India with more focus on sectors such as healthcare, telecom, energy, real estate, media & entertainment, banking, insurance, oil, cement and consumer products

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) Year Ahead Outlook observed that there has been a quantum leap in M&A transactions in India with more focus on sectors such as healthcare, telecom, energy, real estate, media & entertainment, banking, insurance, oil, cement and consumer products. 

Some of the key mergers and acquisitions in 2017 were

• • US$13-billion acquisition by a consortium led by Russia’s Rosneft PJSC, of 98 per cent stake in Essar Oil Ltd, paving the way for the Essar group to reduce its debt.

• • Vodafone-Idea merger forming India’s largest and the world’s second largest telecom company, with about 400 million customers, 35 per cent customer market share, and 41 per cent revenue market share, to take on competitors Bharti Airtel and Reliance Jio

• • Flipkart’s acquisition of eBay India (US$ 500 million) in August 2017 to bolster cross border trade and combat domestic and global competition in the e-commerce industry

• • Axis Bank’s acquisition of online recharge startup FreeCharge (US$60 million) for its foray into proliferating digital payments space in the country.

• • Google’s acquisition of four-month old startup Halli Labs (June 2017) to gain a foothold in Artificial Intelligence (AI), Machine Learning (ML), and deep learning technologies.

• • Airtel’s acquisition of Telenor in February 2017, to increase its 4G spectrum holdings, followed by a merger with the loss making Tata Teleservices in October.

• • Ola’s acquisition of Foodpanda, India’s third largest food ordering app after Zomato and Swiggy, in response to the launch of UberEats in India.

• Torrent Pharma-Unichem merger to accelerate Torrent’s presence in the high growth segments of Indian pharma market like cardiology, diabetology and gastroenterology

Strong future for M&A activities

M&A activity in 2017 in India has increased despite of several prior deals not not closing in 2017 against expectations. This was owing to changes in the regulatory landscape such as the demonetisation drive in November 2016 to discontinue and replace high-currency notes, followed by implementation of the Goods and Services Tax in July 2017. These were coupled with the General Anti-Avoidance Rules (GAAR) effective from 1 April 2016 and a rigorous implementation of the Insolvency and Bankruptcy Code 2016.

As per EY’s 17th Global Capital Confidence Barometer (India), M&A activity in India is expected to remain positive in 2018 as well, with additional disruptive factors likely to boost investments, such as technological innovation and digitization. These come at a time when companies strive to proactively acquire new capabilities for a competitive edge. ASSOCHAM has projected M&A deals to reach US$50 billion in 2018 “on the back of plenty of stressed corporate assets on offer at tempting valuations”. 

Baker McKenzie also expects M&A activity to continue momentum in the current year on the back of the Government’s continued efforts to remove regulatory hurdles and simplify laws to further attract foreign investment, until it reaches its cyclical peak of US$52.8 billion in 2019.