How COVID-19 disruption created a blue sky of opportunities for M&A in India
Prasanth Prabhakaran, MD and CEO of YES Securities (India) Limited, Oaklins’ member firm in Mumbai in an interview with The Economic Times.
Amid the ongoing challenges of the pandemic, corporate M&A has undergone a phenomenal change, which has opened the floodgates for purposeful deals — whether mainstream, cross-border or cross-sector.
M&A represents intrinsic exploration of growth opportunities. In the post-COVID-19 world, M&A prospects have undergone a transformation and found a conducive environment in the form of positive Indian government intervention, a visibly bullish stock market and a relatively stable banking system.
The massive need for domestic consolidation in India — especially in the pandemic-hit sectors — along with ample outbound investment opportunities for cash-rich Indian players and the country’s growing attractiveness as a de-risking hub in the light of China’s COVID-19-led isolation are evident factors that augur well for M&A deals.PRASANTH PRABHAKARAN
In addition, a significant boost has come about in unforeseen fashion. Notwithstanding the havoc it caused across the globe, the pandemic forced the world to become solution-centric in record time. A case in point is the unprecedented disruptive innovation in healthcare: an incredible shrinkage in bench-to-bedside progression, reducing a laboratory contemplation that would typically take several years to a matter of a few months.
Though the rapid vaccine development originated from purposeful collaborations, M&A also had a key role to play. Beginning with the much-hyped AstraZeneca– Gilead Sciences Inc. talks of a merger that never happened, the hunt for COVID-19 vaccines prompted many firms to join hands to combat the virus, including Merck-Themis and Novavax-Praha-Serum Institute of India, besides the US$500 million Pfizer Breakthrough Growth Initiative.
Overall M&A activity, like every other endeavor, suffered a dip after the COVID-19 outbreak. According to Bain & Company’s 2021 global M&A report, deal value and volume for the full year dropped 15% and 11%, respectively. US M&A value fell most, at 25%, but the Asia-Pacific region suffered the lowest regional decline, at 4%.
While the first quarter of 2020 stayed steady for most part in India, a marked increase in distressed deals followed as a direct consequence of the pandemic. The second half gained discernible momentum. Going by Bloomberg data, vaccine breakthroughs — coupled with Joe Biden’s victory, which is being likened to a status quo on tax rates — caused a flurry of M&A activity.
In India, marquee deals were completed in diverse sectors throughout 2020 — right from March–April, when the world was just about coming to terms with the COVID-19 reality. India contributed 12% of Asia-Pacific deals in the first half of the year. In the second half, Reliance Industries Limited (RIL) made headline news for having raised US$20 million from Facebook, Google, KKR and Silver Lake Partners. The company went on an equally impressive M&A and joint-venture-formation spree, making strategic investments in artificial intelligence (AI)-powered tech firms and omnichannel platforms.
The post-COVID-19 operational strategy will now be spelled out up front in pro-forma projections and priority-spend definitions. Target validation will be a meticulous real-time evaluation of asset quality and people issues. The extent and quality of digital resilience will be scrupulously defined.
Fear of the unknown has redefined the momentum and methods of corporate growth strategies — whether via M&A, joint ventures or collaborations. Consequently, phenomenal changes are at play.
Force majeure and material adverse change clauses have become more relevant than ever before, and ditto for warranties, indemnity insurance and policy coverage. M&A designs and deliberations will now intrinsically adopt environmental, social and governance (ESG) principles. Post COVID-19, growth and profitability will organically fit into the broader ESG framework for mainstream economic reasons, not as corporate social responsibility (CSR) mandates.PRASANTH PRABHAKARAN
Many Indian government directives have had a resounding effect. Giving the green light to telemedicine and doorstep drug sale has opened avenues for healthcare in a big way. The February 2020 amendment to the Companies Act, 2013, has resolved the sticky issue of dissenting minority shareholders. The Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) will motivate many players to reassess their growth models and business structures in the guiding light of opportunities.
Electronic filing of applications, including video conferencing for pre-filing consultations for green channel combination filings, should make life easier for Indian M&A players. The value propositions of special purpose acquisition companies (SPACs) — speed, alacrity, cost-effectiveness, better market protection and better bets — make them ideal M&A vehicles. Their popularity in the United Sates is already extending to Asia, and India may follow suit in due course.
Given the stability of the Indian banking system (compared with the dismal scenario during the 2008 crisis), both rescue capital and confidence capital will become available for credible inorganic expansions and organic exigencies, respectively. Many corporates would opt for promoter pledges, divestments and supplementary asset disposals for improving liquidity, ensuring stronger balance sheets and taking calculated risks.
More as a knee-jerk reaction, inorganic growth may be unduly led by bargain buys to begin with. Consolidation is overdue, given the lopsided harm inflicted by COVID-19 on smaller players across badly hit sectors.
The end of the moratorium period in India could, hence, trigger the beginning of an M&A spree. Having said that, over time, only strategic intent will drive M&A agendas to fruition, whether in the form of building new capacities, acquiring critical skills and technologies, effecting prudent consolidation or making breakthroughs in new businesses, geographies and customer groups. Cross-sector deals will become more common than ever, given the import of unconventional alliances to stay ahead of the curve (and competition) in an era of perpetual unpredictability.PRASANTH PRABHAKARAN
Promising startups working on the cusp of technology and healthcare will be among the preferred acquisition targets.
Given the wide-ranging sanitization amid a largely conducive environment, prospective M&A organization targets will become more adept at adapting to seismic shifts — whether technological, sectoral or market-related — to reinvent systems, reengineer processes, redesign continuity plans and reshuffle core teams. Consequently, global supply chains and networks will be rationalized, and disruptive innovation will soar on the wings of technology, including AI, big data, augmented reality, quantum computing, edge computing, blockchain and robotic process automation.
More about the autor
Prasanth holds a post graduate diploma in rural management (PGDRM) from the Institute of Rural Management, Anand (IRMA), and a BSc in physics from Fergusson College. With over two decades of experience in the banking, financial services and insurance (BFSI) space, prior to joining YES Securities (India) he spent almost seven years with India Infoline Ltd. as executive director and president of Retail Broking. Previously, he worked with Kotak Securities, HDFC Bank, Kotak Mahindra and Venky’s India Group.