Corporate India seems to have got the M&A flu. The relatively stronger business houses are on the lookout for new takeover targets, while the weaker ones are desperately trying to ensure that they are not gobbled up by bigger fish. That the affliction should have caught on now is understandable. Industry is currently on a downturn and large-scale pessimism prevails in the economy. Consumers demand continues to be elusive and industry has been forced to cut prices drastically to achieve even marginal sales. The net result is that otherwise healthy companies are suddenly finding their margins getting squeezed and are slowly moving into the red. This is also the longer term trend as a consequence of opening up the economy. The only way to achieve growth in this environment is to buy it. In addition, investors have been shying away from the stock markets and good stocks are available at bargain prices.In such a scenario, where assets are available at far less than they are worth, it makes tremendous businesssense for cash-rich entities to move in with their shopping bags. It is not that only buyers stand to gain in the transaction, even the owners of the companies that are being taken over may benefit. At least it would have a better chance of staying afloat and as any sane person would say, selling off a sinking ship would perhaps yield a better price than a sunk ship.
Increased M&A activity in the economy at a time such as this could have two important benefits. One, it could revive investor interest in the stock market and this in turn could help in changing the otherwise pessimistic outlook that clouds the economy into a more optimistic one. Investors who have had windfall gains as a result of the recent takeover mania would plough their money back into the stockmarkets. If this happens, industrial activity which happens to be on a downturn could find itself slowly edging up. Two, it could help in the creation of larger and stronger companies which would not only tide over current adversity successfully,but would also be better placed to take on the vagaries of an open market even in the future. However, takeovers, whether friendly or hostile, are not necessarily a miracle fix that will lead to the most efficient utilisation of economic resources. The price at which acquisitions are made is crucial, and there are several instances of too high a price bleeding the acquirer's bottomline. This could be especially true in India, where it is not easy for corporates either to sell real estate or prune staff.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
