| India leads emerging market deals |
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| Wednesday, 26 March 2008 | |
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Bullish Indian companies are leading the charge for acquisitions within the developed economies.
On Tuesday Indian car manufacturer Tata completed the acquisition of legendary British luxury car brands Jaguar and Land Rover in a deal worth £1.15bn. At a time when other buyers seem to be retreating from the M&A field, Indian companies’ acquisition activities have not slowed over the past six months. US-backed deals collapse The latest version of the Emerging Markets International Acquisition Tracker (EMIAT) from KPMG International, which analyses deal flows between 10 selected emerging economies and 11 key developed markets, using data sourced from Zephyr, reports 35 deals between India and the developed economies in the second half of 2007, following on from 34 in the first half. One country most definitely not showing such resilience is the US. Traditionally, the US provides the bulk of the deals within the Tracker but the latest edition has seen the number of US-backed deals into the emerging economies collapse from 67 to 39. In all, 62 deals were reported with emerging market companies buying into the developed markets, while 105 deals were reported going in the opposite direction. In the first half of 2007, those numbers were 78 and 148, meaning that the post-credit crunch decline has been less marked in the developing markets. It also means that the emerging-into-developed deals now equate to 59 percent of the developed-into-emerging total; the closest the two totals have ever been. Smaller end of the value spectrum Ian Gomes, chairman of KPMG’s new and emerging markets practice for KPMG in the UK, said that the ability of the emerging economies’ trade buyers, especially those in India, to remain resilient in the face of the post-credit crunch fall-out was commendable. “Before we get too carried away though, we should remember that many of the deals between emerging and developed economies are at the smaller end of the value spectrum. The important point here, however, is that the upward trend in deal volumes is continuing,” Gomes added. In the first half of 2005, emerging-to-developed deals accounted for just under a quarter of the developed-to-emerging deals - a percentage that has more than doubled in just two and a half years. “To see that India’s corporates have been able to remain on the acquisition trail is particularly pleasing. Six months ago, we reported that many Indian deals were highly leveraged and that this could be dangerous if market conditions turned,” Gomes continued. Depreciation of the US dollar Debt finance now typically accounts for 30-40 per cent of the purchase price being offered and, bearing in mind that most deals are in the $50m-80m bracket, this does not represent a prohibitively high amount of debt. Indian corporates and their lenders have continued to act sensibly since the credit crunch commenced, taking advantage of the retraction of financial buyers and the depreciation of the US dollar to push their growth agenda. In addition, they are financing acquisitions though a combination of local currency denominated debt (secured on the Indian business) and foreign currency debt (mostly on the target company) which, for the size of the deals being pursued, is accepted in the current financing environment. The US is the one country whose activity has tailed off the most, according to the Tracker. After recording 83 deals into the emerging markets a year ago – and another 67 six months ago – American deal activity collapsed to just 39 deals this time round. The reason seems quite clear – China. Having accounted for 73 US backed deals in the previous twelve months, China registered a mere eight in the past six months. Challenge for possible M&A targets Gomes explained that the EMIAT showed how China was the US’s destination of choice for some time. He added that recent developments, however, had really slowed down the American trade buyers. Many of the ‘easy’, obvious deals have already been done and new rules concerning the use of Special Purpose Vehicles (SPVs) have reduced their attractiveness as a route into China. On top of this, some Chinese firms now seem to prefer the idea of floating their own business, as opposed to putting themselves up for sale, as a way of securing necessary development capital. “The sort of P/E multiples currently available to companies floating on the domestic stock markets mean that the ‘For Sale’ signs on Chinese companies are now less in evidence,” Gomes concluded. He pointed out that it was also worth bearing in mind that while Indian deals for example have been at the lower end of the value spectrum, deals involving US companies have typically been worth rather more, getting to the sort of the size at which many buyers and lenders may now be balking as the liquidity squeeze continues. “Deals will still happen though so, if China is to be less of a factor, then the challenge for possible M&A targets in the other emerging markets over the next six months is to make themselves as attractive as possible to potential US suitors whose roving eye may now be looking elsewhere,” Gomes said. Related articles
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