India Inc may go slow on M&As

The US sub-prime loan market crisis is expected to temper cross-border mergers and acquisitions as Indian companies go slow on acquisitions.

Lazard India's CEO and Managing Director K Balakrishnan said there will be a squeeze on the availability of funds for financing acquisitions. Also, the cost of borrowing will go up, making big buyouts difficult. " For example, if a company could get 6 times of its EBIDTA two months ago, it would now probably get four times of EBIDTA," he said.

Nimesh Kampani, chairman, J M Financial, said the lenders would be concerned about the financial strength of the borrower. "They (lenders) will be cautious about whom to lend," he said, adding that good Indian companies would continue to get loans in the US markets, albeit at a higher interest rates, till the problem stabilised.

 N M Rothschild's CEO Sanjay Bhandarkar, however, said because Indian M&As were by strategic investors with healthy balance sheets and strong cashflows, they would suffer a lower impact than those done by PE funds in Europe and the US.

"It is true that there will be a short term impact on Indian M&A activities in the overseas markets. However, it is not sure how long will it continue. The big ticket deals, with non-recourse debt on the target company's balance sheet, may have to shell out more interest rates. But lenders will also take notice that Indian companies mostly do strategic buyouts. These financings may not have problems, "he added.

In the first six months of this year, India has witnessed M&A acquisitions worth $55 billion through 550 deals, more than the total size of transactions in 2006, according to the global consulting firm PricewaterhouseCoopers. Of these, the big ticket overseas acquisitions include Tata Steel's $13 billion purchase of Corus Group, Hindalco's $6 billion buyout of Novelis,  Suzlon's $ 1.6 billion acquisition of REPower and Essar Steel's $1.5 billion acquisition of Algoma.

However, no one was sure about the extent of the impact. Lazard's Balakrishnan said the deals witnessed in the first six months of this year did not indicate the right picture as some big deals scaled up the total transaction size. N M Rotchschild's Bhandarkar said it would have a bigger impact if the equity markets tumble further.

However, an economist working with one of the large corporate houses, who did not wish to be named, sounded a cautious optimism. He said the situation being created in the global markets should better be called as "dynamic" rather than "unfavourable." And companies with global appetite and strong balance sheets can spring surprises in such dynamic situations, he added.

The head of equity of a foreign brokerage cited the example of Cadbury Schweppes, which had on August 1 announced to split its US drinks unit, Americas Beverages, on the back of instability in the US debt markets. Under the demerger, Americas Beverages would be listed as a separate company, with its shares given to Cadbury Schweppes shareholders.  He said the split would create opportunity for potential strategic buyers, including Indians, having global ambitions, to bid for the assets which otherwise would have been beyond their reach.

It's clear that the problems in the US credit markets pose problems for Indian M&As. But it will take some time to say whether it throws surprising opportunities as well.

However, an economist working with one of the large corporate houses, who did not wish to be named, sounded a cautious optimism. He said the situation being created in the global markets should better be called as "dynamic" rather than "unfavourable." And companies with global appetite and strong balance sheets can spring surprises in such dynamic situations, he added.

The head of equity of a foreign brokerage cited the example of Cadbury Schweppes, which had on August 1 announced to split its US drinks unit, Americas Beverages, on the back of instability in the US debt markets. Under the demerger, Americas Beverages would be listed as a separate company, with its shares given to Cadbury Schweppes shareholders. 

He said the split would create opportunity for potential strategic buyers, including Indians, having global ambitions, to bid for the assets which otherwise would have been beyond their reach.

It's clear that the problems in the US credit markets pose problems for Indian M&As. But it will take some time to say whether it throws surprising opportunities as well.