Cross-border M&A activity to rise further: Grant Thornton

Prashant Mehra, partner, Grant Thornton India LLP, in an interview to CNBC-TV18 spoke about their deal tracker report.

According to him although the domestic merger and acquisition (M&A) activity has declines, the cross-border activity has been steady and is likely to remains so.Below is the transcript of his interview with CNBC-TV18’s Kritika SaxenaQ: If I look at the report the overall deal volume seems to have jumped up but the deal value has fallen by 37 percent in May on a year on year basis. What is the reason for that? In the beginning of the year we were actually talking about an uptick when it came to the overall value and we saw the average ticket size increasing. Why has there been a sudden fall in May?A: I think it is better to look at the entire deal activity in two buckets which is M&A and private equity. The total transaction value for May 2015 has been about USD 3.3 billion across 115 transactions. M&A in particular which is domestic M&A and inbound has seen a significant slide. However outbound activity has gone up in value terms by about 4 times and in volume terms by about 33 percent. If we look at private equity that has clocked about USD 1.2 billion across 68 transactions and in terms of growth as compared to May 2014 that has been about 50 percent in terms of both value and volume. So, while there has been a significant decline in domestic M&A in particular, the private equity activity continues to be on a rise and definitely has a very positive momentum.

Q: As you said domestic M&A has seen a decline whereas PE investments are going up. Could you divide this as per sectors and is this a trend that is likely to continue that we are actually seeing a decline when it comes to domestic M&A at a time when there actually is a lot of buzz as far as the overall economical turnaround is concerned?A: I don’t think this is something which is a continuing trend. It is probably a season which has come and will go quicker than it has come.In terms of sector spread as far as the M&A space is concerned pharma continues to be a dominant sector contributing 23 percent in value terms and retail and consumer which has been a trending sector in the last couple of months has made a significant contribution this month with about 50 percent in total deal values in M&A. On the other hand in private equity space both IT, ITeS and pharma have contributed about 18 percent each in value terms. However, again financial services sector which has been a trending sector in the PE space has contributed about 40 percent.So, the PE activity continues to have a positive momentum to it but M&A seems to be on a slide and the reason is perhaps that while – as far as the PE activity is concerned there is overall optimism, the macro level indicators look positive. As far as M&A is concerned that seems to be on a slide primarily because the corporate financial year end results are out, they seem to be below estimates, the balance sheets of corporates continue to be in the red.So, what is lacking is the fact that there is lack of domestic acquisition funding. Internal accruals are not there on the corporate sheets, there is no debt available for acquisition funding, valuations have increased and thus we have that gap.Q: Domestic M&A is decreasing but if I look at cross border M&A, it seems to be fairly steady. Is that a trend that cross border will continue to dominate M&A activity?A: Yes, absolutely cross border M&A will continue to dominate because foreign assets are cheaper, there is acquisition funding available for foreign assets which will continue to drive outbound transactions.