COVID-19’s Impact on Indian Mergers and Acquisitions (M&A)
Deep Dives
COVID-19’s impact on Indian M&A has been a mixed bag so far.
On one hand, the number of deals - and their value - has invariably dropped YoY. But on the other hand, India Inc. Is one of the few bright spots in the dealmaking landscape in 2020, particularly among Asian economies.
This disparity speaks volumes on the nature of the pandemic’s impact on businesses and sheds light on what future trends may be.
Let’s dive in!
Table of Contents
Let’s begin with the good news. As of the first half of 2020, India accounted for more than 12% of announced deals in the Asia Pacific region, with the value of deals jumping 18% YoY to $55.3bn during H1.
The 12% figure also represents the highest ratio for the country since 1998. And India Inc.’s dealmaking spree this year defied an 18% net slide for the region as a whole.
This can be attributed to two main factors:
Moreover, this flurry of dealmaking has enabled major Wall Street banks like Morgan Stanley and Goldman Sachs to rake in their second-highest fee income since the Great Recession in 2007. The spate of multi-billion dollar deals allowed these banks to make c. $170m in investment banking fees in January-September 2020, helped meaningfully from private-sector transactions.
This trend is expected to continue in 2021, when many Indian tech firms are expected to list themselves domestically or internationally.
In the first nine months of 2020, while overall capital raising and investment banking fees were healthy, India recorded 776 M&A deals worth $44.8bn - down from previous two fiscals. While strategic M&A remained more or less flat, private equity backed M&A saw a meaningful decline. This is somewhat intuitive as private equity backed M&A was largely seen in hospitality, tourism and travel - sectors that all saw sluggish deal making in light of COVID.
Additional context might help here. In FY20, M&A value fell by more than a third from a record $128bn in FY19 to $82bn. This period was not affected by lockdowns and was only hit by the coronavirus towards the end. The reason why dealmaking slowed down nonetheless were issues like global trade tensions, corporate debt distress and the economic slowdown plaguing the Indian economy.
So M&A was already pressured before COVID came knocking.
As for outbound M&A, the picture (as of H12020) has been bleak. It fell 74.1% YoY, falling to a meagre $449.6m - the lowest level in over a decade. (FYI: The US was the top most targeted nation in terms of value as well as number of deals from Indian companies.)
COVID-19 has been brutal on all businesses and sectors...but tech has emerged from the abyss (remember the market volatility in March-April?) stronger than ever before.
We often read about Apple or Amazon scaling monstrously high market caps every day, but this trend can be seen among Indian tech firms too. More Indians are reliant on the internet now, and this means companies invested in everything from e-commerce, digital payments and edtech to video streaming, social media and healthtech have witnessed a surge in traction and usage.
Chinese companies pledged $579m as investment in Indian companies in H12020, a sharp drop from the $1.5bn in H12019. This can be attributed to border tensions between two countries + India’s new FDI policy, which was widely seen as being framed to avoid opportunistic takeovers by Chinese firms.
The China vacuum is being filled by the US. The latter was the most active foreign player in Indian M&A this year in terms of value as well as number of acquisitions, with value of deals doubling to $8.4bn and market share being 48.9% (as of June end).
What does the future hold for Indian M&A? Besides sunny days for tech cos and the coming-of-age for the country’s digital economy, M&A activity across sectors could pick up pace and climb back to pre-COVID levels in the near-term.
This is likely to be accompanied by considerable consolidation, particularly in sectors that were ravaged by the pandemic (think aviation, hospitality, media etc.). We have discussed many times before how the coronavirus recession’s impact has been grossly asymmetrical - disproportionately hurting small and vulnerable businesses vis-a-vis their larger or multinational counterparts. As such, more consolidation = more M&A.
Another pertinent point to note may be that more M&A does not necessarily translate to healthy economic activity. India is a bright spot in global M&A FY21...but the Indian economy still plunged by 23.9% YoY in Q1FY21 and is staring at double-digit contraction this fiscal. An obvious corollary may be stock market performance. Indian equities have been faring quite well in 2020, but we’ve seen how they can be disconnected with ground economic realities in so many ways.
FIN.
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