Difficult fit: M&As are tough and last year it took a tumble

The flavour of 2017 was more of a wait and watch policy owing to wide-ranging regulatory uncertainty and impact of demonetisation.

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The year ahead looks promising as there appears to be high probability of the following sectors converging: energy and construction, retail and technology and construction and manufacturing.
By Abhishek Sinha

Regulatory, economic and political uncertainties are the first few things which come to my mind, when I try and foresee merger and acquisition (M&A) deal flows and expectations. To add, volatility in the market and valuation gaps have also gathered the same significance in affecting any M&A deal, considering the recent past. Based on my interactions with PE firms and corporates, 2018 may see an accelerated M&A activity in line with what was witnessed in 2016.

The present deal pipeline and enquiries support this supposition. The flavour of 2017 was more of a wait and watch policy owing to wide-ranging regulatory uncertainty and impact of demonetisation. This year, regulatory liberalisation will be one of the key factors which will drive a lot of large ticket M&A deals. Such liberalisation will further improve the ease of doing business in India.


Failure of a M&A deal can be attributed to several reasons. To dive deeper, huge valuation gap is one of the key reasons. Numbers that look good on paper may not be the reality. Valuation related issues can come-up either pre-execution of the deal or in certain cases post acquisition. Pre-execution visibility is much easier to handle as one can simply walk out of the deal or adjust the purchase price. The only loss which the parties suffer in this case, is the time of the deal team and the advisors cost.

Post-execution identification of the valuation gap becomes trickier to handle as it may lead to certain post-closing valuation adjustments or enforcing indemnity obligations, etc. Post acquisition integration is another aspect because of which the deal fails, even after consummation. Careful planning and proper identification of KMPs and having a robust operation and business plan are the key mitigating factors. Cultural integration is a subset of entire business and operational integration. Further, wrong assessment of synergies is another reason for failures, which can be mitigated to some extent by a thought-through business diligence. Market situations which are totally outside the control of the parties also play an important role.

Overall, there was a slowdown in the M&A space in 2017, both in the context of deal value and deal count. The largest deal of 2017 in terms of value was the Vodafone Idea deal at $12,668 million. It was also a year of several unconsummated M&A deals.

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1. The first one that reckons mentioning is the unsuccessful proposed merger between HDFC Life and Max Life. If this deal were to be consummated, we would have witnessed the largest private insurance provider in India. The proposed merger structure was rejected by IRDA, as it took a literal interpretation of the insurance laws.
2. Also, the much-talked Flipkart-Snapdeal merger was finally called off in the later part of 2017. This transaction could have been the largest buyout in India's high-profile startup sector. The founders of Snapdeal took the decision to put an end to the merger talks, citing that the company intends to pursue an independent path.
3. The Zomato-Swiggy merger talks also broke down owing to differences over business alignment and valuations.
4. No agreement on mutually acceptable swap ratios was the reason why the IDFC-Shriram merger was also called off.
5. The much hyped RCom-Aircel merger was also called off. Legal and regulatory uncertainties, and various interventions by vested interests were cited as the reasons for the ill-fated merger talks.

In contrast to 2017, the financial year 2016 set a record in the M&A space, with deals more than double the value of transactions in the year 2015. The consolidation across sectors and foreign investments resulted in this sharp increase. Sectors like telecom, cement and energy contributed maximum in this 2016 sprint. Rosneft-Essar Oil acquisition of and the Vodafone-Idea merger were the big-ticket M&A deals.

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The bottom line today is that both the strategic and financial investors are very sophisticated and completely aware about the factors that could result in failure of M&A deals. The possible pitfalls if identified earlier and highlighted by the advisors to the business deal team can help the owners to deliberate and take a conscious decision. This not only saves costs, but also the valuable time of the business teams, which can be channelled to pursue alterative M&A proposals.

The year ahead looks promising as there appears to be high probability of the following sectors converging: healthcare providers and plans, energy and construction, retail and technology, telecommunications and technology, construction and manufacturing. To sum up, I expect the M&A activity to stay positive and vibrant through 2018, both from an inbound investment and domestic consolidation perspective.

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The writer is Partner, Khaitan & Co.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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