It has been quite a happening year for mergers and acquisitions (M&As). Some marque acquisitions of 2018 were Walmart Inc.’s $16 billion acquisition of Flipkart, UltraTech Cement Ltd’s acquisition of Binani Cement, and Hindustan Unilever (HUL)’s acquisition of iconic health drink brands of GlaxoSmithKline Consumer Healthcare Ltd.
In an evolving domestic and global economic scenario, all these acquisitions encapsulate some emerging trends which will define the nature of M&As in 2019, and beyond.
The key objectives behind M&As are to expand market share, buy technology and diversify market presence. In addition, M&As also act as a potent tool for companies to bridge gaps or mismatches such as market gap, growth gap, resource gap, gap in the growth outlook among business partners, gap between business cycles, and gap in succession planning.
For instance, a pharmaceutical company acquiring an active pharmaceutical ingredient (API) manufacturing company could be an effort to bridge the resource gap. Whereas, partner of a company selling his/her stake could be termed as an attempt to eliminate growth outlook mismatch. Ideally, a company needs to evaluate the present gap and anticipate the future gaps to strategize its M&A plans. Each economic development throws up varied M&A possibilities, which need to be assessed carefully.
A closer look at the nature of M&A reveals two distinctive character traits–compulsion-driven and opportunity-led. And, one can easily find the reflection of those traits in the big-ticket cross-border, mid-market and distressed M&As. The big-ticket cross-border and distressed M&As are prominently compulsion-driven in nature, whereas mid-market M&As are essentially opportunity-led and target-driven. HUL’s acquisition of GlaxoSmithKline Consumer Healthcare is a case in point. The acquisition is aimed at avoiding stagnation of the health drink brands.
Although 2019 is an election year, the general elections won’t be able to take the shine off mid-market M&As, as companies in this segment take decision with a long-term perspective. Usually, election years witness lots of public spending. As a result, the rural economy will see better cash-flow and such a scenario will create the need of funding on the corporate side. However, thanks to the liquidity crisis in the banking and NBFC sectors, M&A transactions controlled by private equity (PE) players will grow. With the National Company Law Tribunal (NCLT) putting stressed assets on sale, the trend of channelizing M&A through PE will grow in 2019.
The banking sector will see more M&As. Three nationalised banks–Bank of Baroda, Dena Bank and Vijaya Bank–have merged recently. As the cost of servicing is increasing, consolidation will happen in the banking sector more frequently. Those players that don’t have differentiating elements will have no other option but to come together.
Automobile components will also witness more M&As, as the sector is currently in the phase of consolidation where bigger players are increasing manufacturing capacity.
More technology-driven M&As will take place in 2019 as the automobile industry is gradually switching to electronic vehicles (EVs). Capacity expansion will also lead to the growth of M&As in the speciality and bulk chemical sector. Business services sector comprising sub-sectors such as facility management service and hospital management service will also witness a number of M&As.
Global geopolitical developments will also have a profound impact on the M&A sector in India. The US-China trade war has altered the equation between India and the rest of the world. US companies were quite aggressive in the acquisition-front in China in the past. However, given the changed scenario, companies in the US will look at India as a potential market for business growth through M&As.
In 2019, companies weighing the M&A option will carry out their gap analysis thoroughly. They will review their portfolios carefully to set things up for selling their less performing portfolios. One has to take such decisions to enter the next growth trajectory.
Mahesh Singhi, founder and managing director, Singhi Advisors.