'Appetite is coming back for M&A deals'

'Appetite is coming back for M&A deals'

Q&A: Saurabh Agrawal, Head of Investment Banking, DSP Merrill Lynch
Abhineet Kumar & Sidhartha / Mumbai September 16, 2009, 0:19 IST

With the economic situation improving, merger and acquisitions (M&As) are back on the radar as companies look to gain size. Though companies are still cautious, given the experience over the last few months, DSP Merrill Lynch Managing Director and Head of Investment Banking Saurabh Agrawal tells Abhineet Kumar and Sidhartha the appetite for M&As will improve in the coming days. Excerpts:

Many Indian companies, which had acquired firms overseas in the last three-four years, are going through a rough phase. What does this mean for overseas acquisitions?
The acquisitions made during 2005 to 2008 would have made Indian companies wiser in their segments and helped them to understand the dynamics and nuances of M&As. Most of these companies are going through a restructuring phase. They have been focusing on reducing leverage either by issuing additional equity or through cutting cost. Once the restructuring gets over, we will see a strong foundation for the next round of growth.
What will drive the outbound deals now?
We expect more manufacturing-driven deals for companies to scale up. In telecom, the scope is very limited. In the forging space, when the situation settles down globally, we will see the appetite coming back.
The last round of overseas acquisitions came on the back of availability of cheap finances. With the cost equation changing, will there be an impact on the M&A appetite?Basically, we are coming from an era of excesses, which took place way back in 2006 and 2007 when leveraging norms went through the roof. In some cases, leveraging was equivalent to seven-eight times of Ebitda (operating profit). There was an excess of liquidity in the system. There were clubbing of a lot of things resulting in a crisis in 2008. But right now, the appetite is coming back for good deals. While people are still cautious, money is available for such deals. People are more focused on the kind of assets a company is buying.
On the domestic front, which sectors are ripe for consolidation and where are enquiries coming from?
There is interest in pharmaceuticals, IT and media. My guess is that these sectors will interest foreign players. In case of media and telecom, there are so many players that consolidation has to take place.
Did private equity (PE) firms, which were complaining of high valuations last year, missed out when the valuation hit a low?
It takes time for PE deals to be come. What we saw was a very good rebound that took place in the capital markets. If the market had not come back, it would have been a PE-driven market. Private equity is always competing with the capital markets as a source of capital.
Recent experiences show that companies which have tapped the market through initial public offers have not performed well on listing. Should we expect that pricing will be more sober in the coming days?
The days of 25 to 30 per cent returns on listing are over. Now issues get priced optimally and it is primarily led by institutions. So, today the roadshow has to discover the demand and what should be the pricing, and then there is book building. Pretty much the system has moved up to optimal pricing.
But the response in the retail segment was not really enthusiastic?
The retail segment is going to be under pressure. Fund raising in the primary market is being driven more and more through institutions. When institutions are investing, they are doing it for the long term.
Has the Merrill Lynch India’s strategy changed following its acquisition by Bank of America (BofA) last year and what is the status on restructuring of its operations?
We were a pure investment bank prior to the merger. Now with BofA taking over, we are more of an end-to-end financial powerhouse. We have many more products and a large balance sheet. As Merrill Lynch India, we always had the ambition of getting a banking licence and now we have that. The integration is pretty much done. Just a few more formalities have to be completed.
http://www.business-standard.com/india/news/appetite-is-coming-back-for-ma-deals/370189/