Deal Activity Hits A Bump

Tepid M&A activity and reduced private equity (PE) transactions in the month of May have left the investor fraternity unhappy. However, in the first five months of this calendar year, the overall sentiment was positive with the government’s ongoing measures towards easing statutory regulations and ease of doing business.

According to consulting firm Grant Thornton, as many as 108 M&A and PE deals were sealed last month, which is marginally low compared to figures in May 2015 that witnessed 115 transactions. In terms of value, however, there has been a 28 per cent dip in the total deal size to $2,379 million last month. While the figures for the month of May go on to reflect subdued sentiments, overall transaction figures so far this year definitely have been good with certain reform measures of the government in the domestic market.

This perhaps explains the increased inbound and domestic M&A activity in the month of May. The word ‘inbound’ here refers to cross border transactions wherein foreign companies pick up stakes in their Indian counterpart. As many as nine inbound transactions were sealed last month worth $1,126 million and the figure is drastically higher compared to the corresponding period last year. In May 2015, eight Indian companies received $157 million. Outbound transactions — where Indian companies acquire stake in foreign firms — saw a massive decrease in terms of value that led to an overall decrease in M&A activity.

What’s interesting is that PE deal flow has also taken a hit with investors taking a cautious approach towards fresh investments in the startup ecosystem which attracted capital in hordes from risk capital investors last year. The value of PE deals dipped to $518 million this year from $1,248 million in May 2015.

Now, if current figures are in anyway a precursor to the future trends, PE and venture capital activity may witness a bit of slowdown in the months to come as investors have already infused mammoth amounts of capital last year — primarily in the new economy sector i.e., e-commerce. However, what can increase the deal value in the overall PE space are a few big-ticket transactions in traditional sectors such as healthcare, energy and natural resources apart from IT and ITeS. Going forward, there may be some big exits which will drive in volumes,but this is not to say that startup funding will dry up. Promising ventures with interesting and unique ideas will continue to receive funding.

In terms of M&A, domestic and inbound activity are expected to pick up. Besides the government’s ‘Make in India’ and ‘ease of doing business’, the ongoing banking reforms around debt consolidation and restructuring are also likely to boost the deal activity through availability of debt for organic growth. All in all, with some hits and misses, this is one sector to look out for!