The company is making larger wagers on acquisitions to come out on top in the race for AI and technology. Yet Crisil Ratings has a word of caution: it is execution rather than ambition that will determine returns when investors have to separate the winners from those hampered by hurdles.
Crisil describes the move as strategic rather than cyclical. Firms are employing M&A to get to market quicker and add capabilities or distribution that would be slower to put in place internally. One sees this most in the artificial intelligence, pharma, consumer and enterprise tech space.
Why deals are surging now
There is a more robust credit environment to thank for the push. With organic capex in check and funding being prudent, balance sheets have more room to manoeuvre. Of the 3,200 or so companies rated by Crisil, median net debt-to-Ebitda was put at some 1.3 times last fiscal, a marked change from the 2.4 times seen in fiscal 2017.
We have looked at roughly 600 transactions in 20 sectors worth over Rs 500 crore apiece, financials and infrastructure aside. “Indian corporates are increasingly using M&As to get ahead, to access new markets and pick up what would take years to build organically,” says Subodh Rai, managing director at Crisil Ratings.
What wins and what fails in M&A execution
A look at 100 large debt-funded buyouts shows two-thirds coming up to par with Crisil’s expectations. The ones that work tend to put 20-80% scale expansion on the table in a year or two, with better margins in the second year once synergies are realised.
The other third did not deliver on their promise. Integration was the culprit in half of them; the rest were down to cross-border or regulatory delays. In short:
– Two in three deals broadly met expectations
– Scale gains of 20-80% in 1-2 years for the successful ones
– Margins to improve from year two as synergies kick in
– A third falling short on account of integration or regulatory matters
Sector playbooks: capability grabs vs consolidation
You will find different motives across industries, which in turn alters the competitive landscape.
Capability, talent and IP
For the likes of pharma, healthcare and AI firms, an acquisition is a means to close the gap on technology and intellectual property and make product roadmaps more relevant in the market.
Scale and speed in core materials
In cement and metals, the priority is consolidation to put capacity onstream in one to three years instead of four or six. It is about cost leverage and scale.
Credit outcomes and what investors should track
Performance has been resilient. Some 60 per cent of acquirers have deleveraged as planned within two years and three-quarters of ratings were either held or upgraded. Manish Gupta, deputy chief ratings officer at Crisil Ratings, attributes this to the offsetting effect of diversification and scale on any temporary rise in leverage.
But Crisil maintains that creating value in the long run is about more than just making a deal. Its prescription is simple:
– Capital allocation that is disciplined through the cycles
– Timely capture of synergies and strong execution
– Ongoing investment in innovation and core capabilities
The message for the investor is unambiguous. The market favours those who can integrate fast and stay true to strategy. As India Inc looks to M&A for a growth spurt, the ability to pair inorganic activity with organic strength will be what distinguishes the leaders, in Crisil’s view.
