Mergers and acquisitions dominate the Indian deal landscape
As one of the leading merger and acquisition markets in Asia, India witnessed steady investor sentiment and a significant number of high-value deals last year.
Increasing clarity on taxation, regulatory reform and postive macroeconomic factors, such as a depreciating currency kept deal momentum high and encouraged inbound investment into India in 2016. However, the execution of these policies remains a challenge and should be watched carefully in 2017.
There were 2,331 deals (including M&A, equity investments and private equity exits) valued at approximately US$77bn in 2016, compared to 2,678 deals valued at US$51bn in 2015. The increase in total deal value was significant on account of a few high-value transactions. The top 100 largest deals contributed 85% of total deal value for 2016.
Mergers and acquisitions contributed almost 80% of total deal value last year, with majority deals taking place in the domestic segment driven by consolidation and potential synergies.
While M&A witnessed tremendous growth, equity investments appeared to lose their sheen, with total value at US$13.36bn, down around 40% from 2015, reflecting increasing investor concerns about aggressive valuations and profitability. However, the drop in the number of deals was only 18%, with several small investments in new businesses attracting the attention of private equity and venture capitalists.
Private equity exits
Private equity exits were at their highest since 2012 and increased by 25% year-on-year. Mergers and acquisitions emerged as the most favourable exit route, rising 12 times in value compared to 2015. Other than M&A, IPOs were the only other exit route to have witnessed an increase this year, serving as a benchmark for investors to assess their valuations and facilitating partial as well as complete exits.
Outlook for 2017
Investor sentiment for 2017 is relatively positive with domestic consolidation expected to continue to push the larger deals. A number of developments may drive deals this year, including:
- Structural reforms: these include the roll-out of the Goods and Services Tax, further liberalisation of foreign direct investment norms, implementation of the Bankruptcy Code, and the impact of demonetisation.
- M&A in the public sector: the Government sees opportunities to strengthen central public sector undertakings through consolidation, mergers and acquisitions.
- Strong sectors: Sectors including consumer, healthcare, internet and real estate that are directly linked to consumption, and financials, are likely to see momentum on the M&A front.
- Boost to infrastructure funding: the Union Budget 2017 allocated INR3,960bn of Government spending to infrastructure to attract public private partnerships on projects across power, bridges, dams, roads and urban development.
- Foreign Investment Promotion Board (FIPB) abolition: the Government has proposed abolishing the 20-year-old FIPB which is expected to make doing business in India easier.
- Private equity and venture capital investments may remain subdued: fund managers are expected to adopt a cautious approach towards fresh funding, especially in start-ups. IPOs and M&A will continue to be the preferred route for private equity exits.
Keeping up momentum
Deals are expected to continue at the same pace in 2017, with a number of high value transactions set to boost deal values. With long-term GDP growth near 7%, consumption can fuel sustainable growth for companies with a presence in India and also offers outsourcing opportunities. Furthermore, the availability of the largest and youngest skilled workforce in the world coupled with relaxed FDI norms will attract more investment in India. Domestic and inbound M&A is expected to top the charts in the next few years, especially in the consumer segment.
Private equity interest in technology and the healthcare sector should continue, but prudence will be required, given the pessimism on private equity exits and valuation expectations.
Overall, India will continue to be a preferred investment destination owing to Government support on structural reforms and efforts to bring clarity around regulations.
Please note that the above summary was derived from deal values disclosed for the transactions and actual deal values/figures could deviate from the above information.
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