[Money Control] Decline in M&A activity due to changing macro trends

Decline in M&A activity due to changing macro trends

The Grant Thornton deal tracker report shows that mergers and acquisitions (M&A) activity has declined in the last two months compared to the previous six-seven months. Partner at Grant Thornton, CG Srividya says that changing macro-economic trends are the reason for this.

“There has been some bit of a decline in the economic growth rate and the stock markets have been more or less stagnant. So this has sort of affected the sentiments of people” she tells CNBC-TV18 in an exclusive interview. She adds that there has been a shift in deals for the month of July. “We are seeing more outbound deals than inbound, which wasn’t the case in the first six months.”

Below is an edited transcript of her interview with Elan Dutta. Also watch the accompanying video.

Q: If you look at it volumes actually continued to be good, but valuations have declined. What does your report say and what’s the reason?

A: If you look at the macroeconomic trends, there have been a lot of changes in the last couple of months. There has been some bit of a decline in the economic growth rate and the stock markets have been more or less stagnant. So this has sort of affected the sentiments of people who do the large deals and acquisitions.

At the same time, the good news is that companies are still going for expansion, both from an organic and inorganic perspective. This is why we are seeing the volumes still quite good. But, the deal sizes have shrunk considerably; we have not seen a single billion dollar plus deal in the last two months.

A lot of the companies which made acquisitions last year or the first four-five months of the year are still in the process of consolidating and they are not looking at new acquisitions right now.

Q: Talking about sectors, what has caught your attention? You mentioned in your report that infrastructure, power and energy seem to be garnering the maximum investment?

A: That’s a new trend that we are seeing now. There is a fundamental shift from the global delivery model to the indigenous domestic consumption led sectors. This is something we are seeing over the last few months and it has accentuated in the July deals as well.

So lots of the deals are driven by significant growth possibilities and prospects in domestic consumption vis-à-vis a global delivery model. Hence, we are seeing some of the traditional sectors sort of stagnating on the deal front and some of these new sectors coming up significantly, primarily power, travel and tourism and agro.

Q: Inbound deals ofcourse more than outbound, but are you seeing a sort of a comeback as far as outbound deals are concerned?

A: Absolutely. The first six months we saw a significant shift where in there were three times as much as inbound deals as outbound deals. But just for this month, which is July we have not seen too many inbound deals. We are seeing more and more outbound deals, but again these are small size deals.

Q: Talking about investment trends, private equity you are saying is showing positive momentum. But what about the IPO market, any such movement there?

A: Yes, IPOs have seen a very lackluster performance this year. Companies have raised less than a USD 1 billion in the first 7 months of the year, all in total. We did something like USD 7-8 billion last year alone for 12 months.

The markets have been more or less stagnant, as I mentioned and even those few companies which managed to raise funds are trading significantly lower than the IPO pricing. So this has discouraged a lot of companies from going for raising funds from the IPO market, which actually is a positive thing from a private equity perspective because there is a higher demand for private equity and there is anyway no dearth of funds there. So there is a significant momentum, which has picked up since the beginning of the year, which is continuing its traction right now.

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