Old economy sectors steel show

BANGALORE: It’s raining M&As in India with the first six months of 2007 seeing 339 deals worth $44.09 billion. However, in terms of value, the IT/ITeS segment’s ranking in the overall sector contribution has come down to eighth from first in 2006. And, old economy sectors such as steel and aluminium have outshone many sectors recording multi-billion dollar transactions.

According to Grant Thornton’s report Dealtracker, IT/ITeS sector saw deal value of $1.02 billion, accounting for 2.32% of total M&A value. Compared to this, steel sector in the same period saw deals worth $13.9 billion (contributing 31.52% of total value), telecom worth $10.9 billion (24.83%), aluminium sector worth $6 billion (13.61%), power and energy worth $3.5 billion (8%), FMCG, food and beverages worth $1.67 billion (3.77%), ores and metals worth $1.09 billion (2.48%) and pharma, healthcare and biotech — $1.08 billion (2.47%).

These deals include transactions within the country as well as cross-border. Grant Thornton partner – corporate advisory services C G Srividhya said: “The IT/ITeS sector has generally come in the first two positions in terms of deal value in the last couple of years. This year, it has been overtaken by other sectors, especially in commodities areas like steel and aluminum.”

The mega deals in non-IT sectors include Tata Steel acquiring Corus for $12.2 billion, Hindalco buying Novelis for $6 billion and Vodafone buying Hutchisson Essar for $10.8 billion.In 2006, M&A deals in the IT/ITeS sector totalled $2.9 billion, accounting for 14.3% of total deal value of $20.3 billion.

The sector ranked first among overall segment contribution last year, ahead of other segments like pharma / healthcare / biotech and telecom. However, the sector is still the leader when it comes to number of deals. In H1 2007, the figure stood at 75, accounting for over 22% of total deal volume. Ms Srividhya says, while there is no major dip in value in the IT/ITeS segment, the growth is not the same compared to other sectors.

According to TPI India partner Siddarth Pai , the acquisition plans of Indian companies might see a bit of a lull for now due to the turbulence in the global financial services industry. The global BFSI sector, which is the highest spender on IT, has been witnessing some shocks, especially with the financial services giants like UBS and Morgan Stanley issuing profit warning. He added, “It is very difficult to gauge what will be the IT spending by BFSI sector from the next calendar year and Indian companies will be more focused on their earnings, than acquisitions.”

The rise in M&A volume for the Indian IT/ITeS industry also reveals the growing appetite of the sector. Douglas S Land, MD, The Chesapeake Group, an investment banking firm, felt that there is two-way movement with regard to mergers and acquisitions.

Indian IT firms are increasingly looking at acquisitions in Europe and the US as means of expanding IT domain expertise and market reach. On the other hand, IT firms in the US and Europe are looking at India to get the scale. Mr Land said, the valuations of Indian companies were still very high making it a expensive buy, but it is the opposite for firms in Europe and the US.