Indian firms Thermax India, Marico Ltd postpone M&A plans, foreign buys down 50%

AHMEDABAD: Engineering and chemicals major Thermax India has postponed a $100-million Europe acquisition plan in the water treatment business. Consumer goods company Marico Ltd that too was planning to acquire a European company in the health and wellness sector will now wait for a few months.

Gloomy conditions in the western economies have discouraged Indian firms from proceeding with their mergers and acquisitions plans.

Consulting firm Grant Thornton says the number of M&A deals has dropped from 660 deals valued at $50 billion to 600 deals at $40 billion this year.

The total value of outbound deals (Indian companies acquiring businesses outside India) for 2011 is $10.4 billion (132 deals) as compared to $22.5 billion (198 deals) in 2010. While the inbound deals (foreign companies or their subsidiaries acquiring Indian businesses) for the current year totaled at $26.9 billion (132 deals) as compared to $9 billion last year.

Marico chairman Harsh Mariwala says current times are not favourable. "Acquisitions, for us, will only happen once we see a reasonable valuation. But this is quite unlikely over the next few months,” he says. Thermax managing director MS Unnikrishnan says, EU valuations are a bit confusing. "We need to assess how the market pans out economically for us,” he says.

The ongoing Euro zone crisis, downgrading US debt economy coupled with domestic economy’s shrinking productivity, slowing GDP, high interest rates and, fall in rupee have made Indian firms wary of M&A activities. Too much of caution is ruining the M&A thrill.

“Indian companies are too wary of buying large assets overseas, especially in EU zone due to vague nature of valuations and integration of assets at time,” says Raja Lahiri – partner, Transaction Advisory Services, Grant Thornton India. The firms are not willing to shell out more money and outbound deals are getting restricted to $25-50 million per transaction.

A professor at IIM Ahmedabad feels, “For the time being, the interest rate cut is most likely step to minimize the tension.” While all eyes are set on the expected rate cut from Reserve Bank of India (RBI) very soon, India Inc is also looking at the budget that might unveil a few surprising incentives to bolster corporate enthusiasm.

“Earlier it was foreign-led issues; now spiraling domestic hassles including government’s policy paralysis action are making investors nervous. Although, deal-makers are willing to shake hands to form partnerships but are quite unguided over domestic macro scenario,” says Vikram Hosangady, partner, KPMG. He added that the foreign investors are closely watching the action and the next three months will see a weak trend, more in outbound and relatively less in inbound deals.

The recent decision of the government to hold the retail FDI, after clearing the much-awaited bill in Parliament, has sent wrong signals abroad. “The investors who are looking at India over China seek business-friendly policies to operate for a longer term. “The pending bills such as insurance, pension and aviation and a few more need to be considered with a positive approach,” adds Hosangady.

So if India looks unattractive, emerging countries like Russia, China and Brazil will eat into the country's share the IIMA professor said. As per the United Nations data, India received less than $ 20 billion FDI in the first six months of 2011, against $ 60 billion in China. Brazil and Russia grabbed $23 billion and $33 billion inflows respectively.