Indian firms recognise the importance of M&A in value creation

24 September 2018 4 min. read

Mergers, acquisitions and other means of inorganic growth are some of the most reliable ways of generating additional value – something that Indian firms have increasingly recognised over the last decade. According to analysis from PwC, between 650 and 700 companies are acquired in India on an annual basis.

In its latest report titled ‘Value Creation: Laying the foundation for mergers and acquisitions,’ Big Four accounting and advisory firm PwC has elucidated the importance of value creation and the various factors to take into consideration when looking to generate more returns.

The firm divides value creating into two broad categories, namely returns for the owner and returns for other stakeholders. When operating a business, most entrepreneurs are looking to achieve a few fundamental goals, including but not limited to reaching a revenue level higher than their capital costs.

Measuring value creation

For other stakeholders, on the other hand, value creation becomes more complex. If successful, a business develops a relatively stable customer base, which in turn develops a certain minimum level of value expectations. A large part of these expectations is the assumption that the company will remain up to date with the state of the art.

Aside from customers, other stakeholders also include a firm’s own employees – whose expectations are also likely to evolve with a company’s growth – as well as investors in the firm and society as a whole. Those involved in creating a regulatory environment are also stakeholders in a firm’s development.

To this end, PwC has devised a multi- layered mechanism to measure value creation that extends beyond traditional frameworks such as EBITDA (earnings before interest, depreciation and tax as a percentage of revenues). According to PwC, EBITDA falls short in terms of measuring a firm’s potential earnings.

M&A deals amongst Indian companies

As a result, PwC’s mechanism places value-creating activities at the centre of measuring a firm’s success in this domain. The firm then places other broad metrics within the assessment framework, with intrinsic value being the next most important factor, followed by stock prices and total shareholder returns.

In light of such a scenario of growing expectations, one of the most effective and time efficient methods of adding value for a company is through mergers & acquisitions (M&A). Inorganic growth offers immediate access to new customer bases, new technology as well as new products.

Over the past decade, Indian firms have chosen precisely this avenue towards value generation. Nearly 3,400 Indian companies have engaged in M&A activity in some form or the other over the last decade. Annually, an average of 600-750 firms have been acquired in India over the last decade, each involved in transactions averaging at Rs. 2 billion.

M&A deals amongst BSE 500 companies

As per the report, total value of M&A activity in India over the last three years stands at $120 billion, which jumps to $180 billion for the last five years, and a staggering $345 billion over the last five years. The growth in M&A activity has gone hand in hand with substantial growth in India’s private equity sector in recent years.

Commenting on the M&A scenario in India and across the world, Partner & Leader for Deals & Private Equity at PwC India, Sanjeev Krishan said, “We live in a volatile, uncertain, complex and ambiguous world, and it will continue to become more so. This only means that what may seem right today may not be so tomorrow. These observations also apply to any pre-investment appraisal process, which has accordingly seen a significant jump in the intensity of efforts in recent times.”