The Indian M&A market

The Indian M & A market is far from mature ; IPOs are a better bet for most industries ‘The only constant is change.

’ This adage holds very well in the corporate sector. Yes, it is true that Indian market is in nascent stage and from decades, the rule followed in the business is to grow or die. Companies that do not grow tend to stagnate and destroy the shareholders fund. The need of the hour is either going for public or opt for some strategic M&A. Going public for a company is changing from private ownership to public ownership through initial public offering.

M&A and IPO are considered as a vital part of a healthy economy and are the preferred ways of obtaining growth. The fund raising strategies are governed by market conditions. Generally, it is seen that in a bull market the number of IPOs increases while in a bear market, the number falls due to poor response of the investors using IPO. But M&A activities are governed by competition with the strategies of own-them-if-can’t-beat-them or dual-benefit. The terms merger and acquisition are completely different although they have common motive of “creating value for stakeholders”.In 2009, public issues remained stagnant for most part of the year sowing the decline of 55% (in numbers) over 2008.

Total proceed in the IPOs were of INR 15675M, with the major contribution of Real Estates (30%), Industries and Telecom (19%) and Media and technology (17%). The IPO market got active in 3rd and 4th quarter, while almost all the IPO are subscribed at higher band. In the first half of 2010, India accounted for 2% of the global IPO funds raised. With the total of $2. 1billion 27 deals have been made.Coal India is set to begin a road show to promote what is expected to be India’s biggest stock listing worth $2.

1 billion, which is likely to be released by October. The flood of emerging markets IPOs was also largely fuelled by excess liquidity in the global markets. There has been a dramatic increase in the money supply in the India, China and other countries. The best reason to buy an IPO is to partake in the growth of a small, young company, to hold a chance to get in on small, fast-growing companies at the bottom floor. During the financial year 2009-2010 a total of 35 IPO’s listed.Of the 35 issues as many as 24 or 68.

57% ended in positive territory. The ability for larger firms to go public may be driving some of the acquisitions of more mature startups, as any acquirer that can buy before an initial public offering has a less complicated deal on its hands — although the threat of an IPO can also drive up the price, along with the enhancement in the brand value and wealth of the company. With the blend of proper knowledge, investment in IPO can lead to expansion without necessary operations and working.It has been seen by the stake of Reliance Industry Limited in East India Hotel, thus enabling reliance to enter in an oligopolositic market structure of hotel industry. But the other phase cannot be ignored.

The IPOs can be detrimental with respect to the time taken by SEBI in approval, cost of issuing and disclosure of information to the competitors. Also, the strict guidelines of SEBI are another major issue. An IPO should only be an option for the few companies that have stellar growth records.The companies with excess of revenues $100 million and management teams that have the experience and fortitude to operate public companies in today's public markets. These are the companies that will attract the attention of underwriters capable of generating fees sufficient to maintain their interest and the coverage of security analysts that will promote the company's stock through the recapitalization process. Furthermore, since the IPO market is cyclical, it may not always be open, even for the most suitable companies.

Due to the rejection on the grounds of bad market conditions, in real estates, the line-up includes a long-delayed IPO from Emaar MGF, the Indian JV of Dubai’s Emaar Properties, a $600 million IPO from Lodha Developers, a $600 million offer from Sahara Prime City and a $515 million issue from Embassy Property. The expenses associated with being a public company, including audit expenses, BOD compensation, underwriter cost, governance and legal costs are all additional factors that companies considering an IPO act as the icing on the cake.Due to the financial crisis in 2008, the M&A activity fell by 62% in 2009 compared to previous year as it created the uncertainity about the future and widened the gap in the valuation and expectations of the buyers and the sellers. There were M&A deals worth about $16 billion in 2009, down from close to $40 billion in 2008.

Between January and July 2010, the cumulative M&A deal value has touched $49. 7 billion, 411 M&A deals so far. The proposed merger between Bharti Airtel and South Africa's MTN would be India's biggest-ever M&A deal.The potential value of the Bharti Airtel-MTN deal would amount to $23 billion. In recent years India Inc. has been high on mergers and acquisitions.

Nowadays, news of Indian Companies acquiring foreign businesses is more common than other way round. Buoyant Indian Economy, extra cash with Indian corporate, Government policies and newly found dynamism in Indian businessmen have all contributed to this new acquisition trend. Indian outbound deals have been constantly showing increase from year 2001. They went shopping across the globe and acquired a number of strategically significant companies.It certainly seems a merry time for Indian corporate!! One of the biggest examples of an Indian acquisition (he is an Indian after all!! ) is that of Arcelor-Mittal.

Even after facing many hurdles Mittal managed to acquire Arcelor creating a milestone in the consolidation of the global steel industry. The mathematical concept of two plus two four is not applicable in M&A, it is always greater than two. Therefore, the combined entity is considered as more valuable, profitable than individual companies and that the shareholder value is also over and above that of the sum of the two companies.Despite negative studies and resistance from the economists, M&A’s continue to be an important tool behind growth of a company. Reason being, the expansion is not limited by internal resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase firm's market power.

Also, organizations merge and form a single entity to achieve economies of scale, widen their reach, acquire strategic skills, and gain competitive advantage.Mostly acquiring companies nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so always boils down to synergy; a merger benefits shareholders. There is flip side to mergers. “Integration is ignored in the majority of business combinations. This is a major reason why 60 percent to 80 percent of all business combinations undergo a slow, painful demise.

” -Journal of Property Management Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market.The executive ego, which is boosted by buying the competition, is a major force in M;A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. The need for the acquirer to take control is only natural. Similar to how a lion will kill the cubs when it acquires a pride, to take control of the pride and its lineage. Unfortunately during the process to impose its mark, it may destroy some cubs that could grow to be successful hunters and help the pride flourish.

Of course the cycle will repeat itself, when the next lion comes around.At that time the outgoing lion will get a familiar message, “It’s not personal, it’s just business”. On the other side of the coin, mergers can be driven by generalized fear. The economic downturn made weaker firms more willing to accept offers than they were in good times. Jumping into bed with a strong suitor is a more appealing prospect than lonely bankruptcy.

Globalization, the arrival of new technological developments or a fast-changing economic landscape, that makes the outlook uncertain, are all factors that can create a strong incentive for defensive mergers.Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. Acquisitions gradually increase the need for major organizational restructuring, and such restructuring plays an important role in more fully realizing the potential of the firm’s acquisitions which is difficult to implement and sustain. Similar is the case with Tata-owned Corus, Britain's biggest steel maker, plans to sell a majority stake in a large steel plant in London.According to 'The Financial Times',(January 29, 2009) the deal should provide more breathing space for the Anglo-Dutch steelmaker as it attempts to implement a difficult restructuring programme necessitated by the worst downturn in the steel industry in more than 60 years. In my view, it is having no sense of company M&A activities with the IPO both are having their own role to play in the capital market.

IPO can be considered as the beginning of the journey while M&A are the main junction of the journey.In the whole life of the company there will many such junction falls and it depends upon the plans or strategies whether to stop at that junction or not. In last one year there is the flood of M&A in the Indian auto sector. Tata Motor acquire Jagron and Land Grown for the technology while M&M eyes on the Scooter India and the demerger of Hero and Honda is about to take place.

M&M is one color of rainbow in the business life cycle. Many companies use merger and acquisition as a tool against the strict rules of investment for entering in a particular market. In IT sector too, M&A too are preferable than IPO.Reason being the handful trained employees and the infrastructure. This can be visualized by several big deals such as that of HP-Compaq, Microsoft-Hotmail and IBM- Sun microsystem.

IPO are offered when there is not much gain by conquering the competitors. It gives the path for innovation and development, such as Reliance Power IPO issued by Reliance ADA Group to develop, construct and operate power projects in the world. Important consideration is, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals.The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations.

In case of IPOs, it is always important to have the eyes on the long-term horizon when one is making any investment decision and not to be led by the opportunistic promotion of IPOs which often accompanies such issues. IPOs tend to come to the market when the issuers of those shares think the price they can get is high. A few ‘winners’ are always ready for an IPO. The smart small investor can ride to riches on the coattails of instant billionaires.