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M&A deals expected to accelerate in 2011 as China, India hunt for natural resources

November 8, 2010

While mergers and acquisitions had a bumpy year in 2010 with Chinese and Indian companies dealing with turbulence in trade and economies, a fizzy festive season is spelling a much more optimistic 2011. Outgoing deals especially in natural resources read oil and coal from emerging markets such as China and India are expected to increase as are investments into the growing nations.

With the economy back on track, M&A action is picking up. “No one realized that this would be the pace of the recovery phase,” Sandeep Dhupia, executive director (transaction services), KPMG Advisory Services told the Times of India. “Investor confidence is high and companies across sectors, be it telecom, IT\ITeS, healthcare, niche manufacturing or education, are optimistic.”

The Capital Confidence Barometer survey conducted by Ernst and Young, suggests that the mood in India is most optimistic. The survey, which tracks companies’ sentiment, found that against a global average of 63 percent, India scores as high as 92 percent—which means 92 percent of people in India believe that the overall market has improved. “The air of positiveness pervades every sector of the economy,” says Ankur Pahwa, partner, E&Y.
This is permeating into the M&A deals. Although if compared with 2007, which was considered good, the volume of M&A deals has been more or less the same, the deal size has risen, bringing in higher figures overall. “In Q2 (July-September) 2010, 155 deals took place, which is almost at the same levels as in 2007; but if we look at the overall figures, it comes to US$17 billion now against US$3.5 billion in 2007, which shows the rise in the deal size,” notes Pahwa.

Some of the factors attributable to the spurt in deals and deal sizes are  stagnant growth in the US and Europe, resulting in greater Western interest in positioning their businesses in the region; well-capitalized private equity buyers seeking investments; Asian companies realizing they need to grow beyond their borders; and cheap money.

Chinese deal activity too, both inbound and outbound, has been a key driver of the global M&A rebound in 2010. The volume of takeovers reached US$139.3 billion as of October, up 3 percent on the previous high of US$134.6 billion during the same period last year, according to research by Dealogic.

Natural resources continue to be the main industry target for Chinese investors overseas. The largest Chinese purchase so far is China Petrochemical’s US$7.1 billion acquisition of the Brazilian unit of the Spanish oil company Repsol. The deal is also the second-largest on record for China Petrochemical after the acquisition of Addax Petroleum Corporation for US$8 billion in 2009.

So what has changed in the last few months? While inbound investments into India and China are rising, the domestic market is also abuzz with activity. And unlike a couple of years ago, when Chinese and Indian companies would only look at developed economies like the US and the UK, they are now looking at emerging markets as well. West Asia, South east Asia, South Africa, Latin America and Sri Lanka are among the hot favourites now.” Further, 2011 is expected to be an exceptional year for M&A’s where deal sizes are expected to touch 2007 levels again.

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