On the Boom in Indian M&A

Published on19 FEB 2019

The article below is from our BRIEFINGS newsletter of 19 February 2019

India's private sector is going through a wave of consolidation as companies look to keep pace with sweeping technological, regulatory and governmental changes. We sat down with Sonjoy Chatterjee, chairman and co-CEO of Goldman Sachs' business in India, who shared his thoughts on the evolving landscape.

Last year was a record year for M&A across India. What's driving that activity?

Sonjoy Chatterjee: There are several factors driving M&A in our view. Local companies are consolidating because they need capital and scale to run their businesses. Small- to mid-sized companies are merging in order to compete in a corporate landscape that has changed dramatically from a decade ago. Meanwhile, large conglomerates are looking at capital for their long-term growth strategies and are optimizing their portfolios through asset sales, mergers or partial monetizations. In the telecom sector, for example, 14 companies have been winnowed down to three, as one of India's largest conglomerates, Reliance Industries, has set new market benchmarks for product and pricing.

Recent changes to India's bankruptcy law, or the Insolvency and Bankruptcy Code, are forcing more companies that can't repay their debts into the bankruptcy process. As a result, the assets of companies in sectors most affected by the build-up in non-performing loans, such as energy and steel, are being auctioned off and attracting interest from potential buyers. For example, Luxembourg-based ArcelorMittal's USD 7 billion bid for Essar Steel India, which is in the midst of insolvency proceedings, is one of the largest cross-border transactions.

How much of India's M&A activity is being driven by foreign investors?

SC: It's significant. India attracted more foreign direct investment than China last year. Strategic buyers and private equity investors are deploying capital in India because the growth outlook is strong, driven by domestic consumption. Technology is another catalyst. Just as China's technology sector has exploded in recent years, India's tech activity is starting to mirror that level of activity, particularly in the consumer financial and consumer retail sectors. In some cases, consumer retailers are looking to build both an online and offline presence, as was the case with Walmart's acquisition of Indian e-commerce company Flipkart last year -- a deal on which we served as Flipkart's financial advisor. China's Alibaba and Tencent, Japan's Softbank and US companies like Amazon and Apple are looking to invest -- or increase -- their presence in India in some way.

You're describing large-scale shifts in technology and regulations. How has the makeup of companies in India changed?

SC: India is a country of family-owned businesses. There has been a massive governance shift since Prime Minister Modi came to power in 2014 and the old ways of doing business have changed. That has led to questions over how -- and whether -- the next generation of business owners will, or are able to, cope with the changes. With rising foreign investment flows leading to good valuations, several families are looking to exit their businesses and deploy capital in completely new areas in line with the generational shift. This was unthinkable in the Indian context until a couple of years back.

How would you describe the state of corporate India at this point?

SC: Corporate India is in the midst of a painful transformation, as companies struggle to adopt a more flexible capital structure to meet their rising investment needs and protect market share. In the mid to late 90s India went through a painful transformation largely because scale, technology and capital deployed were all suboptimal. The ones that survived accessed capital markets, strengthened balance sheets and built scale in their enterprises with the right technology. But somewhere in that phase of growth, some governance was compromised and capital structures weakened. The current stress in the Indian financial sector has constrained availability of funding. The new bankruptcy code is also forcing assets to change hands. Today, the search for proper governance and that capital is firmly chasing better governance -- is both stressful and exciting. We're likely to see a new corporate order emerge in 2020 and India will come out stronger as a result.