By Daniel Hunter
There is large global appetite to tap into the high growth Indian market but international acquirers often struggle to identify opportunities and meet seller expectations, according to the latest findings from a KPMG report titled ‘Doing deals successfully in India: lessons from the dealmakers’.
The research also finds that successful acquirers unlock the market through their personal relationships. To get under the skin of market-leading practices, the research took in interviews with M&A heads from leading international companies who have successfully conducted transactions in India in the last 6 years.
Vikram Utamsingh, Partner and Head of Transactions & Restructuring at KPMG in India, commented: “Acquirers need to be patient to do deals in India. International acquirers that are new to India can struggle to get a foothold, with around a third finding it difficult to source targets. Even when acquirers are able to identify an opportunity, around half find vendors’ price expectations unrealistic and, moreover, a third of would-be acquirers find targets unwilling to sell at all.
“Our research shows that investing time in building relationships is critical if an acquirer wants to crack the market. Dealmakers need to understand local business culture and, accordingly, need to make it personal: get to know the family and once you have been accepted as a ‘friend’, you will have the ingredients of a successful deal.”
Sanjay Thakkar, transactions services partner at KPMG in the UK, added: “While medium to long-term, British companies are keen to tap into India’s growth, many have been put off investing in the short-term due to the uncertain regulatory environment. We are seeing tangible evidence of this with the decline of deal flow into India in 2011, in spite of a devalued currency making acquisition opportunities cheaper.
"International investors need certainty that a new geography will provide a stable environment for them to do business. In a world where countries are competing with each other for international investment, India needs to make sure companies aren’t put off and decide to place their bets in other Asian countries such as Vietnam or Korea. India has some very appealing factors, not least a favourable exchange rate, and we are increasingly seeing the seller/buyer price expectation gap reducing but India does need to ensure it offers an internationally competitive regulatory environment.”
Key insights from the report:
- India has an attractive domestic market and the innovation capabilities of its companies are highly desirable
82 percent of participants made an acquisition in India to gain access to new markets and to use India as a springboard to access some of the regional South Asian, Middle East and even African markets. Cost advantage was rarely a driver behind these deals.
- The personal touch is key
For many of the deals highlighted in the study, acquirers were in India building relationships well before their transactions materialized either by forming an Indian subsidiary or by maintaining trading relationships. About 59 percent of respondents used these personal relationships as a method of sourcing the acquisition target.
- It takes time and effort to get to know the family
Promoter-led businesses often have more than one decision maker and, depending on family history, internal dynamics often become part of the M&A process. Most of the participants in our study spent time in India getting to know the potential targets personally prior to the deal which allowed them to focus on a limited number of opportunities. 82 percent of respondents evaluated less than five potential targets for their acquisitions in India.
- Investable targets are hard (but not impossible) to find
Around a third of the participants found the inability to find targets as a key challenge when searching for opportunities to do M&A in India. Highlighting the fact that a large majority of domestic companies (listed or unlisted) tend to be tightly promoter controlled, about 30% of participants cited unwillingness of a target to sell as a key challenge when evaluating deals in India.
Given these factors and the market access premium that sellers expect in India, over half the participants cited valuations expectations as the key challenge when evaluating potential targets in India.
- Compliance is a challenge and deal structures are needed to reduce risks
Most participants highlighted that coming to grips with compliance issues (47 percent) and historical financial data (47 percent) were the most challenging aspects of conducting due diligence on targets in India, followed closely by tax issues (41 percent). To manage these challenges, acquirers typically implemented transaction structures that allowed them to leave liabilities behind with the sellers where possible.
Participants stressed the need for flexibility on structuring deals when negotiating a deal in India. The overall preference, as cited by participants was to do an outright acquisition and have control from day one. Earn-out structures (19 percent) and acquisition in stages (12 percent) were used where promoter involvement was key or when short term performance/diligence concerns existed.
- The process can seem long and complicated (because it often is)
The deal process in India can seem long even when there is no competitive bidding process. Even where valuation and other terms are agreed, getting approvals from various authorities takes time. A typical deal takes about 12 to 18 months to conclude from conception to closure.
In spite of time spent on due diligence, inbound acquirers can face situations where unforeseen liabilities (like tax demands, non-compliance penalties, customer or employee claims, inventory issues and non-budgeted capital expenditures) emerge after closing. To insure against these, participants typically held back part of the consideration in an escrow account (usually for a 12 month period after closing )
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