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Companies look to enter D-Street on better earnings forecasts (View Comments)
Economic Times Bureau
Posted On Thursday, January 28, 2010 at 04:58:33 PM
Mergers and acquisitions are back on boardroom agenda. Higher earnings projections for companies and improved debt paying abilities are prompting firms to revive the M&A route to expand. Also, with private equity firms hit by a shortage of debt, it is difficult for such firms to close transactions, prompting more companies to look at traditional sources for raising money for their expansionary activities, said a global survey by professional advisory firm KPMG. The survey, which looked at a sample of over 1,000 companies, including eight Indian companies, forecasts a modest increase in both M&A appetite and capacity for the coming year.
“People are coming back to the table and M&A is back on the agenda,” said KPMG India c o r p o r a t e finance head Rohit Kapur. “If you take factors such as appetite of companies and financing ability, there will be more M&A in 2010.”
Growth projections of companies, best indicated by price-toearnings ratios, are expected to expand 7% higher following extreme volatility seen last year, as the effects of the global liquidity crisis made capacity expansion projects uncertain. It also forced most companies in India to hold back mega expansion projects.
The KPMG survey says forward PE ratios for 2010 are 14.0X, compared to 13.1X for 2009. The net debt to EBITDA ratio — typically a measure of a company’s ability to pay its incurred debt — is expected to decline by 18% from 1.5X to 1.2X. This would improve a company’s ability to borrow from banks to fund its expansion plans.
But the transaction time for completion of M&A would take more time as there continues to be a mismatch in the valuation. The matching of promoters’ expectations, and that of the acquirer, will take time to stabilise as companies, these days, have extensive due diligences. “Since March, stocks have been up and so have the valuations. So companies would need to do a greater amount of due diligence and internal selling to complete a transaction,” said Mr Kapur.
While M&A activity in India was strong in 2007, recessionary condit i o n s prompted a fall in the later part of 2008. A r e c e n t D e a l o g i c report says the trend in M&A has already started picking up and that India has emerged as the second most targeted nation among the BRIC region, after China. India has already gathered M&A deals worth $2.8 billion so far this year alone.
From an India private equity perspective, India seems to have become active again, said Vikram Utamsingh, head of KPMG’s private equity advisory. “We are already starting to see a high volume of deal flow. However the recovery of our equity markets means that private equity firms will continue to have concerns on valuation expectations and will face significant competition from public markets.”
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