Cash-rich Indian companies are set to make new acquisitions both in India and abroad as target companies are significantly cheaper now than just six months ago. The cache of cash as an acquisition currency has also increased as global recessionary trends have driven stock prices worldwide to historic lows.
The acquisition of Citigroup's captive Business Process Outsourcing (BPO) arm Citigroup Global Services (CGSL) for $505 million by Tata Consultancy Services -- the largest buyout of a foreign captive BPO in India; the acquisition of the UK's Imperial Energy Plc, one of the leading oil companies with assets in Russia by India's ONGC Videsh Ltd for $2.8 billion; the pending purchase of Axon Group Plc, the UK-based provider of SAP implementation consulting, that has invited rival bids from Infosys Technologies Ltd and HCL Technologies Ltd, are all manifestations of an M&A binge fueled by large cash reserves held by Indian companies.
Indian companies with a war chest of cash reserves, such as Infosys Technologies Ltd, India's second largest IT services company with reserves of about $2 billion; ONGC Ltd with similar reserves; Tata Sons, the holding company for all Tata Group's investments, with reserves and surplus of more than $2.5 billion, among others, have become active acquirers in the market. This has happened as the US Standard & Poor's 500 Index has tumbled 33% in its worst yearly slump since 1937.
Infrastructure-related industries dominated mergers and acquisitions (M&As), accounting for 45% of the deals at more than $11.8 billion of the total deal value of $26 billion this year to September.
"The traction in the infrastructure M&As is symbolic of the need for world class facilities, adoption of internationally-applicable best practices, experienced global management expertise & technology applications to accelerate growth in the Indian economy. To get that resource base of incremental funds and expertise, part of the capital is expected to find its way in to mergers & acquisitions (M&As)," says Bundeep Singh Rangar, chairman, IndusView Advisors Ltd, Europe's fastest-growing Indian mergers and acquisitions firm which advises multinational companies on business opportunities emanating from India's fast- growing economy.
The Indian government has responded to an urgent demand for new infrastructure targeting to spend 9% of the country's GDP on infrastructure by 2012. Estimates suggest that a third of this investment will come from the private sector, presenting an unprecedented investment opportunity, with corresponding inorganic activity.
"The focus towards the sector is buoyed by the urgency to match global standards. This augmentation is expected to cost and attract investments to the tune of $500 billion over the next five years," added Rangar.
The power sector has been the main stay of the M&As this year within the infrastructure sector, which accounted for $5 billion, or 42% of the deal value in the infrastructure sector. The power sector commanded 19% share in the total M&A value of $26 billion this year compared with about $4 billion last year, representing a 7.4% share of the total deal value of $51 billion.
The power sector witnessed two deals worth more than $1 billion – acquisition of the UK's Imperial Energy Plc by ONGC Videsh Ltd and the acquisition of InterGen NV, a Dutch power company, by Indian infrastructure company GMR Infrastructure Ltd.
"The recently-concluded ninth India-European Union summit in Marseille, France, is expected to further accelerate the M&A activity in the power sector as it's focus turned towards the potential of nuclear energy to the growth in trade between the two regions, which is targeted to reach €100 billion ($140 billion) over the next five years." added Rangar.
Among the infrastructure sectors, the power sector was followed by telecommunication sector that emerged the second most consolidating sector with $3.75 billion, a share of 32% in the infrastructure sector deal value and 14% share in the overall M&A deal value.
The other sectors which have significantly contributed to the M&A activity are banking & financial services and pharmaceutical sectors with M&A deal values of more than $3 billion each. These sectors were followed by the automotive sector with deal value of about $2.5 billion.
Source: The Economic Times
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