Analyzing The M&A Landscape In India From A Covid-19 Perspective
The outbreak of the covid-19 pandemic on an unprecedented scale and the subsequent lockdown imposed to flatten its curve not only brought economic activity to a complete standstill but also disrupted the functional Analyzing the M&A landscape in India from a covid-19 perspective competency of domestic and global supply chains.
While the economy trudges the painstakingly slow path to economic recovery, we need to assess the impact of the pandemic on the M&A landscape in India. There is ample evidence to show that covid-19 adversely impacted M&A deal activity in India. There was a considerable deceleration in deal activity in the first half of 2020, both in terms of deal values and volumes. As per data presented by Grant Thornton India’s April 2020 Dealtracker, aggregate M&A and PE deals recorded a fall of 37% and 22% respectively as compared to deal volumes in April 2019 and March 2020.
Data tabulated from the Investment Banking Scorecard of Refinitiv, strategic M&A, comprising 626 deals pegged at USD 36.4 billion, remained constant as compared to the corresponding timeframe last year, there was a nearly 50% fall in Private Equity (PE) backed M&A comprising 141 deals pegged at USD 8 million, as compared to last year. The period from March to September was a highly crucial phase as the outlook in the M&A ecosystem remained largely subdued. During this uncertain phase, the stress was on maintaining a cautious outlook as businesses concentrated on holding teams together and maintaining client-customer relationships. The first half of 2020 proved to be dismal for the M&A landscape in the country as aggregate deal value fell to a three-year low.
Data sourced from a report from Refinitiv stated that in H1, 2020, M&A deals of India Inc declined to a 3-year low of USD 38.1 billion, a fall of 14.1 per cent as compared to H1, 2019. When social media giant Facebook pumped in USD 5.7 billion to acquire a 9.9 percent stake in Jio Platforms, the digital arm of Reliance Industries, it was touted as the biggest deal of H1, 2020 in India. This made Facebook the largest minority shareholder in the digital company. It has been described as a mutually beneficial deal with the oil-to-telecom conglomerate getting to pare its debt considerably with the cash infusion and the social media giant getting to expand its operational base in one of the world’s largest and fastest-growing markets for digital content. However, overall, the sentiment remained gloomy for the traditional industrial sector as corporate deals were deferred and transactions were delayed.
This was also a time for businesses in certain sectors to reconsolidate their operations. Serious corporates and buyout funds, who had management ability and balance sheet capability smelled a big opportunity in the changing order. They quickly re-calibrated their plans and took lead for the next level of consolidation while placing serious capital to capture the void. There has been a significant uptick in deal activity in October to December period across multiple sectors, which could culminate into actual deals over the next 6-9 months, as the business owners have regained their confidence. Many large business houses and significant players in the industry have started evaluating their business portfolio to identify sub-scale or non-core businesses including the businesses where they don’t have a competitive advantage against small / mid-sized players and placing them on block to release capital & management resources. Mid-sized companies are also activating their plans to consolidate their position and attain scale by grabbing such opportunities, backed by buoyant capital markets and easy liquidity.
The market is also ripe for acquiring stressed assets and even smaller players have their own share of opportunities here. Considerable traction has been witnessed in transactional volumes in the sphere of chemical assets, pharma API, building materials, healthcare products, rigid packaging, electronic manufacturing, and auto components. The upside in market sentiment and investor confidence can be gauged from the fact that the IPOs of several small companies were hugely oversubscribed. Sectors that have been impacted adversely are leisure, travel, hotels, airlines, banking, retail, entertainment, textile and garments. To tide over the covid-19 pandemic crisis, the government undertook several key policy measures and reform interventions to shore up the confidence of global investors and position India as a low-risk, high-value investment destination. Initiatives like lowering the corporate tax regime with an effective rate of 17.16 per cent for the manufacturing sector and formulating production-linked incentive (PLI) schemes like the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) is aimed at spurring local manufacturing.
With a clear focus on building strength and resilience in the domestic supply chain with a view to make India an export economy and reduce its dependence on imports, deal-making activity is expected to pick up significantly in the country. It must be noted here that deal-making becomes a seamless process only with a positive mindset and a conducive business environment. The covid-19 vaccine by itself will not act as a catalyst for fast-pacing M&A deals but the lack of fear, certainty ahead, and a positive atmosphere will bring optimism whereby business leaders will start taking risks for the future instead of trying to protect their past work. Confidence and risk-taking abilities will certainly create the groundwork for a rise in M& A activities. As we pull the curtains in 2020 and look with hope and optimism towards 2021, it is highly anticipated that the momentum of M&A transactions is likely to sustain and gather pace.
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