Mergers and acquisitions in India: economic rationale and market performance

Abstract

During the last five years, Indian economy has seen a slew of mergers and acquisitions. These M&As have been spread across a wide range of industries. However, some of the industries saw larger consolidation through M&A during this period compared to other industries. We found that Banking, Cement, Pharma, Software and Textiles industries were the most active sectors with regard to M&A. our study, therefore, focuses on these sectors for studying M&A in India. M&A in Banking industry was mostly driven by the threat of foreign banks, the banks have been consolidating over the last few years to become more competitive as the Indian banking sector opens to foreign players. We found that the federal government and RBI have also been supporting consolidation. In most of the cases, we found that M&A was guided by the desire to grow bigger and develop a larger customer base / branch network. Finally, our analysis of the industry says that the M&A trend in the banking industry would continue over the next few years. M&A in the cement industry was guided mostly due to internal forces of competition and the fi^ftfc $&f survival. The consolidation in cement industry started at a time when the infrastructure sector was down and construction work was low. The role of foreign players is also significant in the consolidation. Lafarge's entry into India, five years back, gave a boost to consolidation. Even today, the entry of Holcim is expected to cause further consolidation in the industry. Page 1 of 137 Economics Area Independent Project M&A in pharma industry was guided, most of all, by the need to meet the challenges in the new patent regime. The domestic pharma majors went on an acquisition spree to prepare themselves for the entry of pharma globals after the beginning of 2005. Even foreign pharma firms, who had subsidiaries in India, were on a shopping spree to prepare themselves to capture the fast growing pharma market in India. Based on our analysis of the industry, we expect the M&A drive in the pharma industry to continue over the next few years. The consolidation would mostly be guided by the entry of foreign players and the quest for domestic pharma bigwigs to go global. In the software industry, the M&A activities were internally driven. Larger firms acquired smaller to increase their scale and pull in more jobs from their foreign clients, a major cause of M&A in the industry was the emergence of the BPQ sector whereby many existing players acquired smaller BPO firms. The busting of the IT bubble was another reason for M&As in the sector. Post the bubble, many software firms were valued very low and it was easier for the larger firms to acquire them. Our analysis of the industry concludes that the pace of consolidation in the industry would slow down considerably during the coming years as all the major drivers of M&A in the industry shall become less effective. In the textiles industry, the mergers were guided by the abolition of MFA quota system in 2005. The firms in the industry went on the consolidation spree to increase capacity and prepare themselves for the slew of demands expected post-MFA. In the coming years, we expect the M&A activities in the industry to slow down.