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What’s the M&A roadmap for 2023? Top dealmakers have their say

The top 5 deals in terms of size in 2022 were from the financial services, IT services, cement, pharma and infra segments led by the biggest m&a deal in India’s corporate history – the mega HDFC-HDFC Bank merger.

January 03, 2023 / 12:19 PM IST

“The worst thing you can possibly do in a deal is seem desperate to make it. That makes the other guy smell blood, and then you’re dead. The best thing you can do is deal with strength, and leverage is the biggest strength you can have. Leverage is having something the other guy wants. Or better yet, needs. Or best of all, simply can’t do without.”

Sounds familiar? Well, that’s one of the several catchy quotes from the 1987 New York Times bestseller “The Art Of The Deal,” Donald Trump’s effrontery-packed memoir, which he called the second-best book in the world after the Bible.

Thirty-five years later, Trump, who became the 45th US President, is known for a wide variety of other reasons, but his raw deal philosophy cannot be brushed aside. And without a doubt, the all-important ‘leverage’ factor he highlighted in the late 80s would have played a lead role in many of the 762 mergers and acquisitions struck by Indian companies during a challenging 2022, marginally higher than the 731 deals a year earlier.

According to data curated by Venture Intelligence (which includes only transactions involving acquisitions of a 50 percent or higher stake and excludes joint ventures, follow-up transactions of the same deal and Indian M&As as a result of global transactions), the combined value of 358 deals with announced amounts stood at $99,764 million in 2022 versus $63,078 million from 334 deals in 2021.

That represents a sharp YoY jump of more than 36 percent in deal value.

No prizes for guessing, but the stat looks rosy primarily due to the gargantuan $40,000 million HDFC-HDFC Bank merger, the biggest deal in the history of corporate India.

The $7,716 million merger of IT companies L&T Infotech and Mindtree, the entry of the Adani Group in the cement sector with the $7,040 million buyout of Ambuja Cements and ACC, the $3,300 million Biocon Biologics-Viatris deal, and the $2,379 million acquisition of the ports and power assets of the Essar Group by ArcelorMittal Nippon Steel India round up the 2022 list of top 5 M&A deals.

The annual sectoral toppers in terms of deal volumes were IT/ITES (296 deals), manufacturing (110 deals) and healthcare & life sciences (76 deals). In terms of deal value, banking, financial services and insurance (BFSI) – thanks to the HDFC-HDFC Bank merger – IT/ITES, and manufacturing rounded up the top three, according to Venture Intelligence data.

As companies bid adieu to 2022 and shook hands with 2023, the environment is a heady cocktail of global recessionary fears, unrelenting geopolitical uncertainties, inflationary pressures, a high interest rate regime, and the possibility of a fresh China-induced wave of Covid-19.

But against these global headwinds, India’s sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets provide resilience, according to the 26th edition of the Reserve Bank of India’s Financial Stability Report.

So can 2023 eclipse 2022 in terms of M&A activity? Which sectors will be the hotbed of activity? Will bulge-bracket private equity funds continue to occupy centre stage in auctions?

Moneycontrol spoke to a cross-section of senior, top dealmakers from corporate law firms, investment banks and Big 4 firms and nudged them to indulge in some crystal ball gazing.

Of Platforms And Shadow Banks

Zia Mody, Co-Founder and Managing Partner, AZB & Partners forecasts more platform deals in segments such as renewable energy, healthcare and hospitals, along with increased activity in the insurance sector.

Advent International headed by Shweta Jalan displayed the most recent example of a platform deal or roll-up strategy in India, a route that is very popular in the US private equity ecosystem.

In December, Advent said it had sealed a deal to acquire a majority stake in Hyderabad-based listed company Suven Pharma. The private equity firm added that it was exploring a merger of Suven Pharma with its platform Cohance Lifesciences, which houses three portfolio firms from the CDMO (contract development and manufacturing organisation) and API (active pharmaceutical ingredient) segments – RA Chem, ZCL Chemicals and Avra Labs.

Here’s another example. In November 2021, Carlyle partnered with Viyash Life Sciences founded by pharma industry veteran Hari Babu and Srihari Raju Kalidindi to establish an integrated generic pharmaceutical platform in India.

Net-net, let’s not be surprised if other private equity funds follow the footsteps of Advent and Carlyle to set up platforms across sectors and create higher value, cost efficiencies and synergies.

Mody is also betting on consolidation in financial services and expects one or two cases of nonbanking financial companies combining with banks.

“Large strategic deals will be few, but may happen if opportunistic. The main issue is the valuation reset, which will allow deals to fructify,” she said.

So, what next after the mega HDFC-HDFC Bank combine, which is expected to be completed by the second or third quarter of FY24?

The RBI has harmonised some of the key regulatory requirements of NBFCs with that of banks, significantly reducing the flexibility that was available earlier for non-banks. Improved synergies, the need for size and scale, geographical diversification and access to cheaper liquidity are some of the other factors that have created an environment ripe for consolidation in the segment.

Last month, Shriram Transport Finance Company, India's largest financier of commercial vehicles, and Shriram City Union Finance, the largest two-wheeler financer, joined hands to form Shriram Finance, India’s largest retail-focused NBFC with a net worth of Rs 40,900 crore, assets under management (AUM) of Rs 1,71,000 crore and more than 6.7 million customers.

Deal Street 2023: Lens On Startups

Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas said he expects 2023 will build upon the achievements of 2022 and should be a strong year for M&A.

“There will be opportunities for consolidation in the new economy and tech space where there will be a lot of stress and the IBC (Insolvency and Bankruptcy Code) will resurface as a theme,” he said.

Shroff is right when he highlights the stress in India’s startup system, the world’s third largest, which witnessed a forgettable 2022 and was left badly bruised by plunging valuations, deferred IPO launches, down rounds and layoffs.

The funding winter led to the birth of a new moniker in the startup segment – unicorns are passé, the latest is ‘cockroach.’

Yes, you read that right! The term is used to describe a startup that displays the ability to survive during extended periods of lacklustre funding by resorting to tighter cost controls. And why not? After all, urban legends suggest that cockroaches can outlive a nuclear disaster.

Also Read | Cockroaches in demand as unicorns catch a cold this funding winter

Pramod Kumar, MD and Head of Investment Banking, Barclays Bank India echoes Shroff’s views when it comes to M&A involving new-age firms.

“Capital deficiency would trigger consolidation in new-age tech in the coming year. Large conglomerates will continue to build capabilities in the digital space as well as shed non-core assets. Hopefully, the dormant bond markets will bounce back so that corporates can access capital,” Kumar said.

Investcorp, the Middle East alternative asset manager that backs Indian startups including Xpressbees, Wingreens, FreshToHome and Incred, was optimistic that the funding winter in the startup ecosystem would not last long.

“This is not a long-term phenomenon and we see credit and liquidity returning… probably sometime early next year,” Mohammed Alardhi, Executive Chairman of Bahrain-based Investcorp, said in an interview to Moneycontrol on November 2, 2022. The firm counts Abu Dhabi sovereign fund Mubadala as one of its investors.

Also Read | We see liquidity and credit returning early next year: Investcorp on funding winter in Indian startups

The IBC Factor

When it comes to the role played by the Insolvency and Bankruptcy Code and its impact on the M&A landscape, the RBI’s latest financial stability report throws up some eye-catching data.

Since the introduction of the landmark reform in December 2016, the RBI said 5,893 corporate insolvency resolution process cases had started by end-September 2022, of which 67 percent were closed. Of these, 21 percent were closed on appeal or review or settled, 19 percent were withdrawn, 46 percent ended in liquidation, and 14 percent culminated in approval of resolution plans, according to the report.

It will be interesting to see how buyers, sellers, lenders and administrative officials avoid the litigation and controversies that plagued the sale of high-profile IBC assets such as Essar Steel and Bhushan Power. Take the recent case of Reliance Capital, where the Torrent Group has knocked at the doors of the National Company Law Tribunal following a revised bid by the Hinduja Group, according to media reports.

Asked for his top sectors for M&A activity in the new year, Shroff said, “Financial services, healthcare and real estate are my top sectoral picks and the main risk, if at all, would be geopolitical factors disturbing our markets.”

The fact that M&A veterans Mody and Shroff both have healthcare/hospitals on their list of deal friendly sectors for 2023 is not surprising. Transactions at various stages of the deal cycle include the stake sale in Manipal Hospitals, the sale process of TPG-backed Care Hospitals, the deal involving Emami Group-backed AMRI Hospitals, which has hit a litigation hurdle, and the exit of True North from Kerala-based KIMS Healthcare.

What’s the big ‘deal’?

Like the others, Haigreve Khaitan, senior partner at law firm Khaitan & Co., is also betting on the entry of established conglomerates into new sectors. He expects two specific deal structures/formats to occupy centre stage in 2023.

“Stock-swap/rollover equity deals will be one to watch out for. This will be a risk-allocation theme for buyers, regardless of how good balance sheets and cashflows currently are. Also, we should expect carveout deals, especially by MNC businesses, to remain a recurrent theme and strong interest by private equity firms in these types of opportunities,” he said, adding that M&A in infrastructure, renewables, banking and financial services will continue.

The Private Equity Factor

Now, let’s shift focus to the private equity universe.

Private equity-venture capital (PE-VC) investments (including minority deals) in India dipped by almost 30 percent in 2022 after a funding party in 2021. PE-VC firms invested $46,786 million as part of 1,260 investments in 1,181 companies in 2022, compared with $65,000 million across 1,362 deals in the previous year, according to Venture Intelligence.

In terms of buyout/control transactions, private equity funds sealed as many as 36 deals in 2022, with a combined announced value of $7,652 million across 28 deals.

Remember the Ontario Teachers' Pension Plan Board acquiring Pune-based Sahyadri Hospitals Group from the Everstone Group and Blackstone’s purchase of a controlling stake in IT services firm R Systems International last year?

So will funds continue to be active in 2023 as well?

Yes, said Vivek Gupta, Partner and National Head (M&A/PE Tax), KPMG, who identified three broad themes going ahead.

“First, on the private side, financial sponsors will dominate the deal landscape in the form of large control deals and strategics, barring a few, will be quieter. Secondly, expect to see some interesting consolidation and buyouts in the new-age unicorn space as public markets are likely to become more selective and careful. Last, infrastructure as a sector will perhaps emerge as the largest recipient of capital,” Gupta told Moneycontrol.

On the other hand, Ajay Arora, Head of Investment Banking Advisory, EY India, is very bullish on manufacturing.

“Deal activity in the manufacturing space is expected to ramp up significantly in 2023 due to increased strategic interest from global companies as well as buyout PE funds driven by three key reasons – the gradual revival of the capex cycle which is ‘real’ for the first time in many years and has seen entrepreneurs investing in both greenfield and brownfield projects, firm government support through initiatives like the PLI scheme, and the China-plus one factor,” Arora said.

So, there you have it. The dealmakers have had their say. Guess it’s time for India Inc. to start – you guessed it right – leveraging.

Ashwin Mohan
first published: Jan 3, 2023 10:58 am