Recessions have taught lessons to many even to the favorite pet at your home. Among all these many of the lessons are positive and where as many are on the way to become positive. Recessions have educated us in many ways. Among them emerging economies is making the world economy educated about the process of making positive outcomes.
Emerging economies are now in the phase of cross border acquisitions. The volumes of trade have increased across the globe. Emerging economies are helping out the companies who are on the verge of collapse. Global merger and acquisition volume and size have increased to some astronomical levels in this post recession period. If we look historically we will hardly find any such period of recession whether of small term or long, such aggressive volumes of M&A.
If we start from India which is one of the leaders in merging economies now we find astronomical appetite for M&A among our business magnets in India.
• In the first month of 2010 deals worth nearly $3 billion (about Rs13,950 crore) were announced by Indian corporate.
• According to the monthly deal report of VCEdge, a financial research provider, the M&A deal value during January 2010 stood at $2.8 billion, a whopping 126% rise over the same period last year.
• Domestic deals were in fervor during January 2010, as there were as many as 29 domestic deals worth $2,303 million as compared to 14 transactions worth $589 million in January 2009.
• If we go for sector wise data analysis to find out which sectors are on the ladder of buyers preference we find telecom, logistics and banking, finance and insurance were the most targeted sectors for investments.
• Even if we break up the volumes of transaction in the favorite ladder of Indian corporate we get deals of worth $2,180 million, $164 million and $117 million respectively for the above favorite sectors.
• These sectors have contributed in total 85% of the of total private equity deal value during the month.
One of the prime reasons for these higher numbers of cross border deals by Indian corporate is that expansion of domestic industries is some what coming close to some stagnancy. Followed with increase of consumer base to maintain the top line of the companies is also a prime agenda. Companies are very well aware that post recession period is an opportunity for expansion. Struggling phase of companies across the globe is an opportunity for the emerging as well as for those companies who are having large pile of cash to deploy for purchase. The last tow points are very much applicable for all economies across the globe.
But among them if we look into the real image on the mirror of such higher number of cross border deals then their will be less place to feel proud for the Indian corporate growth story.
• Indian companies like Bharti Airtel, Shree Renuka Sugars and National Mineral Development Corporation take over stories might make us feel very proud. Moreover the volume of purchase also makes us feel and understand that financial crisis is receding particularly for Indian market.
• But the deals are made up on houses made up of sand. Yes my readers might get shocked about what have been written by me.
• But the fact is this that all these loans are showing signs of too much optimism based upon inflow of foreign funds coming in to domestic markets.
• We should not forget that these funds are nothing but working as short term investments.
• Where once the target ROI is achieved by the foreign funds inflows, the funds will exit Indian markets.
• In that case these cross border deals made for increasing consumer base and increasing production capacity might be difficult to swallow and digest too.
• Even if it is taken for granted that these funds are here to stay for longer term of period in Indian markets any blast of the various financial time bombs placed across the world might rattle the world economies.
• Dubai, Greece and European other countries financial bombs blast have rattled, any such type of further blast might bring up the dark clouds of recession for the Indian companies.
It’s good to have expansion and diversification of business and markets but with some controlled and well designed structures. Companies are running like mad bull keeping in mind cheap valuation of over seas companies followed with increase in consumer base. In many cases the cross border valuations might appear as cheap keeping the present flow of liquidity across the market. But what happens when this liquidity finds the exit door. I doubt that how many of the articles you might have read about this thought line in your daily magazines and other places.
I would like to accentuate that world consumers will take a decade to come back to the demand levels of pre recession phase. We have also witnessed host of funds being raised by Indian corporate for expansion. I might add up some guidelines for the companies to keep a tab on proper M&A deals but when the bull is mad nothing will work in front of him.
The investors are advised to look for long term goals and targets of the company keeping recession atmosphere in mind. Since no one knows when a financial time bomb will go for a bursting mood and all these deals will look like burdens for the companies.
"Loved reading this piece by Indraneel Sen Gupta
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