June 09, 2020
COVID-19 gives rise to opportunities for the M&A sector amidst the crisis
New Delhi, June 9, 2020: As the effects of COVID-19 continue to gradually unfold and manifest in many ways, the corporate world has witnessed a sea of change in mergers and acquisitions (M&A) transactions with deal pipelines largely limited to value buying and bargaining for cheap assets.
Q1 2020 witnessed a decrease in M&A activity in terms of volume and value of 25% and 14% respectively in comparison to the same time last year. Similarly Q2 2020 recorded just 90 M&A deals as compared to 231 in Q1 2020, a drop of 61%. For instance, the telecommunications sector grew 220x in comparison to last year in terms of deal value; in Q2 2020 the deal value increased by 19% primarily due to a big ticket deal in which Facebook Inc. acquired Jio Platforms Ltd. from Reliance Industries Ltd. for $5.73 billion through its wholly owned subsidiary Jaadhu Holdings LLC.
In the first half of the calendar year 2020, out of all deal categories like inbound, outbound and domestic, the greatest M&A deal activity was witnessed in the domestic category which recorded 179 deals compared to 38 inbound and 24 outbound deals. The activity in the domestic category therefore accounted for 64% of the overall deal activity; amounting to $11.9 Bn of the total $22.8 Bn seen in the first half of 2020.
As expected, with the onset of the pandemic, there has been a drastic dip in the count of deals across sectors, however Telecommunications, Financials, Healthcare and Consumer Staples have been able to up their percentage share marginally in terms of count of deals in the overall tally. It is evident that some sectors have or will be worse hit than others, such as the ill-fated aviation and hospitality industries, while others such as FMCG, pharma and other ‘essential’ sectors can benefit.
"The crisis may open up some buy-side opportunities, leveraging on the lower valuations in the short term to seek higher return on capital in the long term. While the current deal activity is down, distress takeovers might provide new energy and we might witness potential delays in obtaining regulatory approvals. Cross border deals would also take a hit as PEs and MNCs look to conserve cash." - Sahaj R Kumar, Head- Research, VCCEdge.
The global business lockdown has created a raft of opportunities for Indian firms waiting with cash eyeing quality international assets. In light of the economic slowdown, the government has announced multiple incentives for various sectors. For instance, the recently announced lower corporate tax regime with an effective rate of 17.16% for manufacturing companies, coupled with several production-linked incentive schemes such as the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) are likely to improve the domestic supply chain and invite a share of global manufacturing to India. The global business disruption due to the worldwide lockdown has not just put firms on a reset mode but also pushed thousands of companies on the road to bankruptcy. Many would begin to consider consolidation to ensure business continuity.
According to VCCEdge, the folly of putting most eggs in one basket (read-China) is now more than apparent to the global majors and this creates a picture where MNCs would look more seriously at putting up an India base to derisk their supply chains.
"It is expected that the pandemic would also trigger a change in the outlook of consumers and a realignment of priorities at the level of the government towards sectors such as healthcare and pharmaceuticals, as well as allied fields such as medical research, medical devices, etc. Further, considering that a large proportion of India’s population is without any insurance of any kind, a crisis of this scale and nature is likely to highlight the need for obtaining insurance, including health insurance, thus potentially resulting in significant uptick in the insurance sector and consequently, increased M&A activity.” - Shalil Gupta, Chief Business Officer, Mosaic Digital.
Post COVID-19, the ‘Make In India’ initiative of the government has received more impetus. Hence, there could be seen a growing number of investments and consolidations in India origin firms so as to be more prepared for the future. Furthermore, with the migrant workforce being dispersed in the lockdown era, it could trigger the need for localised investments and consolidations at the state level as well.
VCCEdge is India’s most comprehensive research platform for private markets. It offers most updated information on deals, directories and financials data that adds up to a holistic financial research platform which is leveraged by investors, fund managers, PE\\\'s & VC\\\'s for deal origination, deal structuring, and valuations empowering them to make well-informed decisions, manage risk and achieve market-beating returns. It has a wide coverage of over 120K private companies and startups. For more details, visit www.vccedge.com.
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