The Future of M&A

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The Future of M&A

What exactly the next few years would bring in terms of M&A activity, the regulatory changes, the financing changes and what the key drivers of M&A will be over the course of the next few years?

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Q: What do you think when will be start seeing consolidation in sectors like telecom, media many people say it is right for consolidation? What will it take to trigger the first wave of deals?

Shroff: I thought it was going to be the 3G pressure which would drive some of the initial sort of consolidation in telecom. But since that itself is a bit of a rough ride just now. It might have just been pushed off by few months. But I think that is what will trigger telecom consolidation in India in the next few months.

Q: You consult a few telecom companies - do they seem ready to you?

Shroff: I will keep it general. That would definitely be one of the drivers because of the sheer requirement for capital and the need to sort of just compete in a more comfortable environment. So that is one. I think just on the other drivers I come back to the comment on internal drivers in many sort of promoter families itself that might be part of some other factors that might lead to consolidation as well.

Q; Internal drivers amongst the many - can you elaborate on that?

Shroff: Let me put it this way. The whole generational changes that are taking place in families and that might drive some of the changes.

Q: When you say generational changes are you saying different parts of the family wanting to do different things.

Shroff: Aspirations of the second and third generations are different from those of the founder generations which are now coming into the 50's and 60's whereas the younger generation is looking at things very differently.

Q: What might trigger consolidation in spaces like telecom or media?

Balakrishnan: I think telecom it is just that. You can't have 12 players
Surviving. So at some point in time you will see consolidation but today
it cannot happen because of the way the regulation works.

Q: So it is this bar on being able to trade spectrum?

Balakrishnan: But more importantly you will see consolidation in other sectors as a diversified group, pick winners and losers so you can't have be a global leader in 20 businesses. So you might decide that these are the five businesses that I want to be a global leader in and the rest of the businesses I might need to let go.

Q: Are you seeing large Indian conglomerates actually wanting to cherry pick of their various businesses?

Balakrishnan: They are thinking about it, I do not think people have as yet bitten the bullet but I suspect that something else is going to happen sooner or later.

Q: You were talking to be about out of the box deals, would you want to elaborate about on the few structures that you told me of gaining appeal?

Saui: The key point is buyers and sellers are having to be more inventive and you are seeing interesting things happening so, when AXO bought ICI for example and in order to get their value proposition up, they decided they need to increase a part of their target asset, so as part of the deal they structured a pre-sale arrangement even though they weren't quite sure what was in the target box if you like so with fuzzy edges they sold some assets to Henko to facilitate a higher valuation so that is one thing that you might see more to get valuations and be more attractive to sellers also buyers will be interested in also on a bigger scale are seeing BHP and RIO doing a big joint venture in Australia in iron ore and that is another approach to doing an MNA deal so people are thinking around the corner more and be very willing to be inventive and to make deals happen.

Q: One of the risks to what you have referred to is prewired sales?

Saui: They can be quite difficult because if I say to you I want a pre sell with say Cyril and if you are the part of my assets you might not necessarily know what it is, you can have purchase price adjustments for example to make sure that when the asset is ultimately sold and the deal is done there is enough give on the arrangement to make sure not too much risk has been assumed that by the blind pre-buyer so its quite a complicated deal to be put together and not necessarily easy so I don't and we might see a slew of all these things but it is something that the inventive deal doer would think about to try and make themselves more attractive.

King: The other thing that we wish should happen in the market hasn't happened as much as perhaps people might expect and we saw it in Kraft and Cadbury successfully and in a hostile transaction where people say you shouldn't be able to use stock in a hostile transaction that they did and they got the deal done and we would probably see more deals using stock and using those sorts of clever structures which at one stage be put on the shelf because this is a cash earning market and you might see some of those coming back and you can also see possibly things like contingent value certificates, so if you have got something that might be a lot of stuff or some money but you cant value it now, a purchaser may say doest that space that hope of something that we would give you real money for now then we will give you value so a sort of contingent asset that you put into your consideration package.

Emmerich: I agree with Peter that we would see some stock deals in the coming years and the biggest barrier to stock deals over the last years during the financial crisis wasn't so much of these technical issues which are in the process of being solved in the globalizing world of listing and so forth so that means there is much more corporation and it would be a great thing if we saw more of that in the Indian market with that being used as consideration in both ways but the biggest barrier in stock over the last 24 months has been the well known 52 week phenomenon we see on CNBC every day we see on Yahoo and the Wall Street Journal the 52 week high and low and it has been tremendous and it has been studied by academics, it has been proven scientific with some analysis but this has a tremendous psychological effect and nobody wants to use that stock when it's at a half or a quarter price that it used to be, it used to be just means in the last 52 weeks and after that its ancient history and you forget about it, the stock has been stable relatively speaking it maybe a little bit on the uptrend for atleast 52 weeks and then you prepare to use it again so we might see more stock deals because we are in a more stable environment even if somewhat depressed and one can say my stock was worth more in 2006 but that's just too long ago to remember.
King: The management is getting over that nad is stabilizing at a lower level.