M&A LANDSCAPE TRENDS AND FUTURE
2020 was a year of uncertainty due to the far-reaching and extended effects of the Covid-19 pandemic. The pandemic had a considerable impact on global M&A as corporations, financial institutions and funds sought to adapt and respond to changes in their respective markets. Yet, despite a halt in M&A activity early in the year, as businesses began assessing the impact of the pandemic and actioned recovery plans, there was significant resurgence in transactions during the second half of the year.
Despite concerns around macroeconomics, corporate governance, changing regulatory norms, geopolitics and global tensions, deal values in 2020 nearly retained momentum with the previous year. At an aggregate level, deal values amounted to little over USD 80 billion across around 1,268 transactions, which is a 7% increase in terms of value as compared to 2019. However, 25% of this deal value could be attributed to sizeable inbound investments in Jio platforms. Strategic deals (mergers and acquisitions) accounted for over 50% of the total deal value this year, while private equity (PE) activity kept pace with last year, recording investments worth USD 38.2 billion.
Excluding big-ticket deals in the telecom sector, the first half of 2020 witnessed a slowdown with investors putting their plans on hold and shifting focus towards cash conservation. Within the PE community, several funds adopted a more cautious approach during the initial months of the year – either to focus on their existing portfolios or with the expectation of revised valuations. Simultaneously, a number of organizations were looking to hive-off non-core assets or distressed segments in an effort to enhance or retain profitability, creating a number of M&A opportunities.
The next few years are expected to be challenging for the Indian economy. However, corporate India has previously demonstrated agility and adaptability in the face of crises. Government reforms and demographic advantage further reaffirm India's potential as a key investment destination.
We have seen significant changes in M&A across locations and sectors, as well as in the way M&A and due diligence is now being conducted. In this article, we list out key trends that will dominate in 2021, and highlight certain considerations to be aware of.
KEY M&A TRENDS IN INDIA
Consolidations
The lockdown in India severely affected almost every sector, especially all consumer facing sectors such as retail. The retail sector struggled to stay above water, creating several opportunities for consolidation and expansion in the sector. Reliance Retail Ventures acquired the retail, wholesale, logistics and warehousing businesses of Future Group for USD 3.3 billion. The acquisition was the largest domestic deal recorded in 2020.
A number of large mergers were also recorded in the banking sector, which was already witnessing a wave of consolidation in previous years. Aimed at improving capital efficiency and financial inclusiveness, the merger of 10 public-sector banks into 4 larger banks accounted for around a quarter of the consolidation activity in 2020. Domestic consolidation spurred a lion's share of the M&A activity in India, accounting for nearly 50% of the total deal value in 2020.
The start-up ecosystem particularly saw a lot of consolidation, most notably in the EdTech and online grocery space. BYJU's (a decacorn and largest player in the EdTech sector) has been steadily acquiring smaller and more niche players such as: (i) WhiteHat Jr, a platform which teaches kids coding; and (ii) Doubtnut, a two-year-old education learning app in order to supplement and expand its existing bouquet of services and for access to customers from smaller cities and towns across India. The Tata Group recently announced that it would be acquiring a 68% stake in the 'essentials' online grocery delivery startup Bigbasket for an estimate amount of 9,500 crores. Prior to its acquisition by the Tata Group, Bigbasket itself increased its market presence by acquiring the milk delivery platform Daily Ninja. The pandemic has presented larger cash rich startups with an unprecedented opportunity to acquire their smaller rivals and consolidate their position in their respective sectors.
Given the volatility, uncertainty and complexity of the current times, we expect this trend to continue well into 2021 and 2022.
Special purpose acquisition companies (SPACs)
Despite the pandemic, SPACs have managed to raise over USD 80 billion in about 237 listings last year in the US alone. The SPACs ability to significantly reduce the amount of time it takes a company to go public (2-6 months on average) than through a traditional IPO process, which can take 12 to 18 months has piqued investors' interest across the globe.
Unfortunately, India's stringent rules on shell companies mean that no SPACs can be listed on the exchanges here. However, for Indian investors, SPACs are a window to participate in an attractive IPO on the Nasdaq; and for Indian tech startups, SPACs offer a sort of "short cut" to the big US market listing. However, recent media reports have indicated that SEBI, India's market regulator, has asked its Primary Market Advisory Committee (PMAC) to examine the feasibility of SPACs in India and submit a report on the regulations required to successfully introduce the SPAC route here.
The recently concluded USD 8 billion deal between India's ReNew Power and Nasdaq listed SPAC RMG Acquisition Corporation II, is among the largest ever listings involving an Indian company in the US via this route. If media reports are to be believed, this deal may very well be the tip of the iceberg as many unicorns in India are apparently considering going the SPAC route to list themselves.
Deals driven by geopolitical changes
On 17 April 2020, the Indian Government amended its FDI Policy under which, all investments by entities incorporated in a "country which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country", will now require prior approval of the Indian Government. The countries which share a land border with India are Afghanistan, Bangladesh, Bhutan, China (includes Hong Kong and Taiwan), Myanmar, Nepal, and Pakistan.
While the intention of the Indian government behind the introduction of the amendment was to "curb the opportunistic takeovers/acquisitions of Indian companies due to the current pandemic", the primary trigger seems to have been the rising geopolitical tensions between India and China at the Indo-China border. The introduction of the Press Note appears to be more of a retaliatory measure to put economic pressure on China to resolve the issues at the Indo-China border.
The FDI ban has had a significant impact on Chinese investments in India, especially in the burgeoning start-up ecosystem in India. Many follow on investments by existing Chinese investors have been stuck as a result of the ban and these have placed tremendous strain on cash strapped companies which are already reeling from the negative impact of the COVID pandemic. In addition to the FDI ban, the Indian government has also banned a plethora of Chinese apps from download and use in India citing national security concerns and is also working on a policy to stop Indian telecommunication players from purchasing network equipment from Chinese manufacturers such as Huawei.
While there has been no significant impact on FDI coming in from other countries, the ban has led to a peculiar situation wherein entities which have a remote and insignificant connection to China (for example: PE funds or non-Chinese companies routing investments through Hong Kong) are also getting caught in the approval web.
We only expect increasing scrutiny from the Indian government on all Chinese related matters and investments till such time the geopolitical issues between the two countries are resolved.
Distressed deals
While the introduction of the insolvency and bankruptcy code back in 2016 gave a major fillip to distressed deal making in India, the pandemic is expected to give another major boost to distressed deals and consolidation. A number of companies across sectors, including manufacturing, infrastructure, financial services and real estate, already faced significant challenges like under utilisation of capacities, inventory pile up and mounting debt in the pre-COVID era. The situation has only been aggravated by the pandemic, which has caused labor disruptions, capital inadequacy and demand contraction, among several other issues. This is expected to cause a spike in the non-performing assets (NPAs), creating very lucrative opportunities for either the PE community or larger players in the sector to buy good-quality assets at attractive valuations. We expect significant interest from both domestic as well as global parties in distressed assets to drive M&A activity in 2021.
Conclusion
While the first half of 2020 was subdued in terms of deal activity, the above factors and especially consolidation, was a major driver for deal activity in 2020 and they will continue to form an integral part of M&A in 2021, possibly driving the emergence of new and larger Indian corporations in years to come. Even PE funds are upbeat about India's recovery and growth story and are anticipating a bumper year in 2021.