The first half of the year 2020 clocked a total deal value of USD 42 billion, down from H1 2019, primarily due to the COVID-19 outbreak. While deal activity could be subdued in the coming quarters on account of challenges in execution and economic slowdown, the India growth story remains attractive to investors with a long-term horizon.
2019 observed a cautious drift in M&A activity, attributed largely to political uncertainty and economic slowdown. Although deal momentum was expected to improve in 2020, the first half of the year remained relatively plateaued, with M&A activity valued at USD 24,227 million from 292 deals. This subdued trend was owed largely to the rapid outbreak of COVID-19 worldwide. Keeping with past trends, Information Technology outnumbered other sectors in terms of deal volume. Financials, Telecommunication, and Industrials are the predominant sectors for H1 2020, bagging the big-ticket transactions that accounted for ~70% of the total deal value.
Some of the notable deals were Jio and Facebook Inc., GMR and Groupe ADP, Krishnapatnam Port and Adani Ports, Yes Bank and SBI, and Corporation Bank and Union Bank. Amidst the global pandemic, Reliance Jio has emerged as an investment magnet for many global leading private equity (PE) firms. In the current scenario, PE investors have routed surplus un-allocated capital to Jio Platforms, due to its proven execution capabilities, almost debt-free capital, and large domestic customer base. The viable business model, and the management vision, backed by extensive experience, have driven investor confidence in the uncertain economic situation.
In their recently concluded webinar "Investment Transactions in India - Opportunities and Key Considerations for European Investors," subject matter experts from Nexdigm (SKP) shared insights on prevailing investor sentiment into Indian M&A deals. One noteworthy observation was the "wait and watch" strategy that investors are employing, as they prudently re-evaluate their investment plans in the current uncertain economic environment. Investors are also constantly looking out for aggressive price reduction mechanisms, broader representatives and warranties, and more favorable indemnity arrangements with the sellers.
The year 2020 anticipated positive growth in equity investments, owing to the investor confidence built-in 2019, marking a critical period for equity investments. However, the pandemic subdued sentiment, and the deal value for H1 2020 stands at USD 16,413 million, an 8% decline from H1 2019. However, sectors such as telecommunications, information technology, and healthcare emerged optimistic, accounting for ~80% of the total deal value, with an aim to minimize impediments in the new way of life. Some of these deals are Piramal Pharma and Carlyle Investment, Indo Star Capital and Brookfield Asset Management, and investments in Jio Platforms.
Private Equity Exits
IPOs had gained traction as an exit route in the initial quarter of 2020, contributing to almost 10% of the deal volume, while 2019 had observed single number exit deals through IPOs. However, IPOs expect to undergo turmoil over the coming quarters in the current, cautious market. Investors are holding their positions, sanguine about selling at a higher price in the future, leading to a drop in private equity exits. Some of the major exits witnessed include Embassy Office Parks REIT and Blackstone Advisors India, Intas Pharma and Capital International, and Lauras Labs and Warburg Pincus India.
Impact of COVID
The uncertainty around business projections, discord on the valuation of companies, and diversion of cash flows to operational needs have hampered deal success. Nevertheless, the government and businesses are undertaking relentless efforts to tackle the crisis and ensure that the long-term potential of investments remains intact. With India’s determination towards promoting "self reliance," the government has curbed corporate tax rates and has indicated further considerations under the "Make in India" initiative, to emerge as a more favorable investment destination than its South Asian peers. Coupled with businesses exploring restructuring and supply chain diversification to address the changes in geo-political dynamics, these incentives are expected to encourage transaction opportunities over the coming years.
The post-pandemic "new normal" is expected to witness a turnover in industry and trade dynamics, with investments being steered towards essential industries, to leverage underlying opportunities for innovation. M&A-related activity would continue to hold potential, as businesses acquire stressed assets, and industries witness consolidation to achieve competitive synergies in the current, challenging scenario.