Why overseas M&A options are off India Inc's menu for now

Indian companies for whom inorganic growth was a key element of strategy are doing a rethink. New acquisitions have become well-nigh impossible owing to a series of problems.

There are worrying signals for mergers and acquisitions (M&As). While some brave mid-sized companies may still be scouting around for buyouts overseas, the general consensus is that Indian companies will be cutting back on acquisitions in the coming year.

Already, trends suggest that M&A figures in 2011 have been lower than that in the previous year. A report in The Economic Times quoting Grant Thornton’s estimates says that outbound deals this year have fallen rather dramatically to just over $10 billion from $22 billion-plus the previous year, as concerns over imminent economic slowdown hit India Inc.

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While investment bankers are continuing to engage with the top brass of those companies which had either announced acquisitions going forward, or were planning strategic buyouts overseas, privately most agree that the M&A option is now virtually out of India Inc’s growth plans.

Says a top executive at a frontline global investment bank: “With interest rates being where they are in India, funding an acquisition today is a very tough proposition. The market will not take kindly to companies which do so.”

Some companies - among them Marico and Thermax - have already put their M&A plans on the backburner, according to _The Economic Times_report. Some mid-sized companies, which had made public their M&A plans, are also likely to join the ranks, senior investment banking sources told Firstpost.

“Even if dollar funding was a less expensive option, given the exchange rate, even that is also turning out to be a huge problem,” said another investment bank head. Add to that the mark-to-market (MTM) hit (where the market values of acquisitions are written down), and there is likely to be a major hit on the market valuations of such companies as shareholders will likely vote with their feet if companies take such risks in these times, investment bankers explained. “Companies may cry themselves hoarse that these MTM hits will be reversed over time, but no one will listen in these times.”

Companies will, therefore, have to wait and watch to avoid a further leveraging of their balance sheets as the cost of money still remains at higher levels. Investment bankers reckon that only those companies, for whom some smaller acquisitions overseas make strategic sense, will be brave and still go ahead with their plans.

“If it’s a missing piece in an overall strategy for, say, an engineering or technology company, then it may still make sense. Otherwise, clearly not,” said one banker. Even in such cases, only smaller acquisitions will make sense. “Companies which made $100 million acquisitions will now be looking at buys of much smaller sizes and that too only for strategic reasons, if such buys are part of an immediate strategy.”

Further, investment bankers point out that companies will also be better off waiting rather than going for overseas buyouts since, given the widely discussed policy paralysis, they wouldn’t risk even smaller acquisitions when the policy-making environment is fraught with confusion.