Insolvency and Bankruptcy Code lifts large deal activity
A new report by Bain & Company reveals that merger & acquisition (M&A) activity in India has been strong and steady since 2015, with more than 3,600 deals worth a total of over $300 billion closed over the period. Large deals were the primary driver of growth.
There were 60 such large deals in India over this period. Bain & Company defines a large deal as one that is valued higher than $250 million, and the cumulative value of large deals in India between 2015 and 2018 amounted to $120 billion. The volume of these deals has been high, and the authors report that the number is on an upwards trend.
The cumulative value of large deals doubled between 2015 and 2016, reaching the $23 billion mark. The value then doubled again between 2017 and 2018, taking the total to a staggering $56 billion. The largest deals took place in the energy and technology sectors. Notable examples include Walmart’s $16 billion acquisition of Flipkart (2018), the $13 billion acquisition of Essar Oil by a Rosneft-led Russian consortium (2017), and Adani Transmission’s $3 billion acquisition of Reliance Infrastructure’s integrated Mumbai power distribution business (2018).
According to Bain, this upward trend has been driven by regulatory developments. In 2016, the Insolvency and Bankruptcy Code (IBC) was passed in India, which created the possibility of bidding for distressed assets. That act came into effect by 2018. The contribution of this act to deal volume is evident from the fact that more than 40% of the deals in 2018 amounted to 40% of the total deals.
A number of other factors have also contributed to growth in large deals. Inorganic means of consolidating market presence and increasing market share have gained popularity in India. Examples of this can be found in a variety of sectors.
For instance, telecom giant Airtel acquired Tata Teleservices in 2019 as well as Telenor assets in 2018 with the objective of maintaining its strong position in the telecom market. In 2017, a similar trend began unfolding in the cement sector, when UltraTech Cement acquired Jaypee Cement, and later bagged Binani Cement in 2018.
Another major factor that has contributed to a boom in large deal activity is the tendency among large firms in India to internalise towards their core operations. Many businesses are shedding their non-core verticals, using the money raised in this process to rejuvenate their core operations.
Bain cites the example of GlaxoSmithKline selling its India Consumer Healthcare portfolio to Hindustan Lever as an example of this trend. The firm reports that the telecom sector showed a similar trend, with many divesting their tower assets to newly emerged companies that specialise in tower development.
The firm zooms out to a macro level to explain the last contributing factor to large deal volume, which is simply growing interest in the Indian economy. Amid reports of slowing economic performance, deal volume in the country appears to be growing. Insolvency and the purchase of distressed assets has been one reason for this.
However, Bain also reports an increase in non-distressed deal volume, which has grown from 9% of the large deal volume in 2015 to 20% in 2018. Major deals in this category include Walmart’s acquisition of Flipkart last year. Growth in deal volume aligns with expert predictions for M&A in India previously. Early last year, Big Four accounting and advisory firm EY predicted that M&A in India would maintain a healthy volume in the near future.
Bain’s analysis confirms this, while also offering a more nuanced perspective on where the growth has been concentrated. Walmart’s acquisition of e-commerce firm Flipkart signifies growth in retail and industrial goods M&A, while other areas of concentration include the energy and telecom sectors.
Summing up the analysis, Partner at Bain & Company Dinkar Ayilavarapu said, “The profile of Indian M&A has changed materially in the last five years. We are observing five deal archetypes, which are more common today than five years ago. For example, about 30% of deals announced in 2018 were distressed deals coming through the IBC process. Similarly, scope deals, carve-outs, and mega deals are also increasing in salience. Each of these archetypes have unique value creation drivers and risks during the deal cycle, and acquirers must tailor their approach accordingly. Additionally, we have found that companies which develop a repeatable M&A capability through material and frequent transactions are most likely to be highly rewarded by investors.”
