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The inevitable logic of M&As

business Updated: Jul 14, 2007 02:52 IST

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There has been a remarkable spurt in mergers and acquisitions in recent years. Mega deals of Tata Steel and Hindalco had made big news a few months back. Recently, Vodafone has been in the limelight. A lot more smaller deals have gone through and many more are likely.

M&As have become an accepted business strategy the world over. The total volume of deals in the first half of 2007 was $2.5 trillion, 53 per cent higher than the previous year, according to data collected by Thomson Financial. There have been a large number of deals even in conservative Europe. The take-over of Dutch Bank ABN Amro has offers going up to $97 billion.

What is amazing, is that a significant part of the deals have been by private equity firms which have amassed formidable financial power. In the first half of 2007, they were responsible for $527 billion worth of acquisitions or nearly 21 per cent of the total. They buy, restructure and most often sell companies to make handsome profits.

M&As by non-financial companies are motivated by different considerations. Modern management and technology necessitate that the size of businesses has to be much larger and M&As are the only way to attain global economic proportions in a short time. They can also be a vehicle for acquiring technology, securing internationally accepted brands and establishing a presence in the overseas market. It was inevitable that Indian companies also should follow this route since they have become global players. M&As have consequently become an effective business strategy though, in spite of their rapid growth, India’s cross border M&As are only 1.9 per cent of the world total.

India’s cross border deals - inbound and outbound - amounted to $46.8 billion until May this year, according to Citigroup Global Investment Bank, and would most certainly exceed $100 billion by the end of December. The inbound traffic is mainly going towards telecom and financial services like banking, insurance, and other non-banking financial services. The outbound traffic is to industries like auto ancillaries, oil and gas, pharmaceuticals, and consumer goods.

The business environment has been highly conducive for M&As. First, there is easy access to finance from the global banking system. Second, stock prices have been rising sharply resulting in a phenomenal increase in wealth to back up debt. Third, there has been a flood of cash flow with companies, with sales in the manufacturing corporate sector increasing at more than 26 per cent and net profits at 56 per cent.

It may appear a little odd that Indian companies should be investing abroad when the need for investment here is so acute. That is because overseas investment is critical to remain viable in an intensely competitive international market. But we can certainly have more investment in India by foreign companies if enough room is created for them. This investment will be mainly in green field projects though much of the overseas investment by Indian companies will be in mergers and acquisitions.

The writer is president, RPG Foundation.