Is India Overtaking China in the M&A World?
Vineet Aneja speaks to us below about the everchanging M&A sphere in India. With the country drawing in more investments year by year, we look at what sectors are flourishing and why.
What has been your biggest challenge that you overcame in this sector?
The legal requirements which include approvals from the appropriate regulators, procedural challenges, lack of clarity in certain laws and the various compliances, are the biggest challenges that I have faced in the realm of M&A. Even though, the legal challenges are sector specific, one thing which is uniform across all sectors is the quantum of time consumed to get certain regulatory approvals. Although, the Government has introduced reforms such as the single window clearance and reduced timelines involved in procuring licenses and approvals, there is scope for more to be done. I have tried to overcome this challenge by ensuring that my team conducts foolproof legal due diligence on the target company so as to identify issues upfront and reduce cost and concerns that may arise at a later stage. While there is increased focus on transparency and ethics, the regulations have become stricter increasing the need to be compliant and abide by the law. Having said that, it has become essential to prioritise the concerns and issues raised through the due diligence process. The key is to analyse the critical parameters of a deal and stay focussed in achieving them without being distracted with issues that can be negotiated.
Foreign acquisitions valued at USD 39 billion were struck last year, and for the second time in a decade, India drew more inbound investments than China.
Can you share the current M&A scene in India?
The financial year 2018-19 has been quite a vigorous year for the Indian M&A landscape. Deal making has reached new heights with some of the key acquisitions being UltraTech Cement Ltd’s acquisition of Binani Cement, Walmart Inc.’s USD 16 billion acquisition of Flipkart, and Hindustan Unilever’s acquisition of the health drink brands of GlaxoSmithKline Consumer Healthcare Limited. Foreign acquisitions valued at USD 39 billion were struck last year, and for the second time in a decade, India drew more inbound investments than China. With the recent liquidity crisis in the non-banking financial company (NBFC) sector and the focus of the National Company Law Tribunal (NCLT) to put stressed assets on sale, there has been a continual growth in the M&A sector which is likely to carry forward to the financial year 2019-20, alongside the coming into effect of the new law on bankruptcy – the Insolvency and Bankruptcy Code. In recent times, companies that are unable to repay their loans are being declared insolvent or bankrupt, as a result of which, the assets of such companies are up for grabs. A case in point being Arcelor Mittal bidding for Essar Steel India, which is in the midst of insolvency proceedings, becoming one of the largest cross-border transactions. Lastly, Narendra Modi led government winning the general elections, that too with the ruling party having a majority on its own, is expected to have a positive impact on the deal environment.
India has become the prime location for investment of pools of global capital from strategic to financial sponsors.
What sectors are flourishing in relation to investment and M&A? Why is this the case?
India has become the prime location for investment of pools of global capital from strategic to financial sponsors. M&A transactions are booming in the Indian e-commerce industry which witnessed the USD 16 billion Walmart-Flipkart deal, making it the world’s largest e-commerce deal ever. E-commerce is a capital-intensive industry and companies like Flipkart and Amazon have invested billions of dollars in marketing and establishing infrastructure like warehouses and logistic chains. This market is here to stay and grow.
The key driver is to make sound financial and management decisions to increase future cash flow and earnings and bring the level of uncertainty down.
Further, in the healthcare sector, pro-industry government policies, boost to healthcare R&D initiatives, strong market fundamentals and mounting awareness for new-age healthcare products and services has emerged to drive growth in this area. India’s drug sector recorded deals worth over USD 2.1 billion in 2018, as was seen in Aurobindo Pharma acquiring the dermatology business and three manufacturing units of Sandoz for USD 1 billion, becoming the largest outbound deal by an Indian drug firm. In fact, the deal activity in January 2019 has been led by pharma, healthcare and biotech sectors driven by Radiant-Max Healthcare deal valued at USD 1.3 billion. The banking sector is likely to see more M&A, as seen in recent times, with the merger of two nationalised banks – Dena Bank and Vijaya Bank into Bank of Baroda which was approved by the Cabinet in February 2019. From recent trends, it is expected that consolidation in the banking sector will happen at a faster pace in the coming year.
Another key driver would be to widen the base among different customers.
What are the key drivers to M&A?
The key driver is to make sound financial and management decisions to increase future cash flow and earnings and bring the level of uncertainty down. Any company that wishes to one day exit the market by selling their business through M&A transactions should aim to maximise the value of their company. Further, achieving synergies is also a key driver and the principal objective of an M&A deal. Synergies mean the combination of the overall benefits of the two businesses which in turn enhances the efficiency and boosts the performance of the new combined entity achieved through the sharing of resources which the individual entities lacked before the M&A.
Another key driver would be to widen the base among different customers. This is because the more concentrated the company is with a single customer or just a group of customers, the risk factor for the acquirer is higher. In this scenario, losing just one major customer could considerably impact the financial position of the company.
What do you think investors should be keeping their eye out for in the next year, in terms of M&A development?
Factors such as the on-going trade turbulence, the liquidity crisis in the banking sector and the depreciating rupee, the sector specific regulatory concerns and the ever evolving foreign exchange laws (for cross-border deals) should be considered by investors prior to structuring an M&A deal.
Managing Partner | Clasis Law
I am the Managing Partner as well as a founding partner of Clasis Law. My professional journey as a lawyer began more than 20 years ago and I have a plethora of experience across practice areas such as corporate commercial, retail, hospitality, employment, e-commerce, education, healthcare, white collar. I have provided specialized transactional and advisory services across sectors, covering diverse areas including:
- Joint ventures and strategic alliances, mergers and acquisitions including private equity, venture capital, business transfers, disposals and combinations of businesses, buy-outs, carve-outs, restructuring and divestment;
- General corporate advisory in relation to day to day matters, advice and assistance in setting up and running a business in India including the issues relating to foreign exchange laws of India;
- Advice and assistance on the exit options; advising on viable modes of structuring of the deal, from a regulatory and exchange control perspective;
- Advising clients on the applicability of various employment laws in India, both Central and State level legislations; guidance in employment termination/ downsizing.
The firm, Clasis Law is a full service Indian law firm that is international in vision, scope, experience and capability. The core values of the firm include a high degree of legal expertise, commitment to excellence, efficiency, integrity, focus and client care, all of which guide each member of the firm, be it the partners, associates or staff of Clasis Law in their business dealings on a daily basis. With the in-depth expertise and know-how of the partners, together with highly trained teams, the firm is able to provide clients with bespoke solutions and exceptional service.
Expertise within the firm spans a range of practice areas including corporate and commercial transactions, aviation & aerospace, banking & finance, asset & project finance, insurance, infrastructure, real estate, intellectual property, employment law, competition, compliance & auditing, shipping & international trade law, TMT, litigation & dispute resolution and white collar. The firm acts for a diverse domestic and international client base across a number of industrial sectors. Further details on the full spectrum of the firm’s experience and expertise across practice areas and industry sectors can be found on the Clasis Law website.