The Maturation of M&A in India

Investment bank Signal Hill Capital Group LLC is coming up on the one-year anniversary of its launching an office in India, and since then, a lot has changed.

The firm opened Signal Hill Capital Advisory India Pvt. Ltd. in Bangalore in response to the rapidly changing Indian economy. With India's becoming a major contributor in global economics as an emerging market, the dynamics of dealmaking have evolved throughout the country.

Mergers & Acquisitions spoke with Signal Hill's head of India, managing director Klaas Oskam, about what's in store for dealmakers looking to tap into the world's seventh largest country.

How has M&A in India changed?

Eight years ago, M&A was by and large a novelty. Today, there is more private equity and venture capital driving the market. Companies are more familiar with M&A processes, so the market has matured a considerable amount. Generally, investor interest is up, and foreign direct investment levels have seen a multifold increase. If you look at the number of PE firms now, versus the number of firms in the country then, many of the leading players have set up shop. For instance, Kohlberg Kravis Roberts & Co. (NYSE: KKR), Bain Capital LLC, Advent International, Providence Equity Partners, Apollo Global Management LLC (NYSE: APO), TPG Capital LP, TA Associates Inc. and Summit Partners LP have all launched India offices during the last several years.

The last 12 months, however, have not been the easiest in terms of India growth. The country saw about 5.5 percent growth across the board, down from 7 to 9 percent in the years before. The market just hasn't matured as much as the U.S. market.

Where is there the most deal activity?

Technology, media and telecom are definitely active. So are the industrial and consumer products and pharmaceutical and healthcare space. There's also a fair amount of activity in education and, over the next couple of years, large amounts of capital will go into infrastructure projects in order to build out roads, airports and power plants. It's a long-term process. The lower middle market is very active, but large scale M&A and pure initial public offering activity has been lackluster. Only in December and January has it started to pick up again.

Telecom tower company Bharti Infratel Ltd. (NSE: INFRATEL) raised $832 million in what was India's biggest IPO in two years. Bharti Infratel is the telecom tower subsidiary spun out of the largest telecom operator in India, Bharti Airtel. There aren't many big M&A deals, but activity is starting to pick up.

What new challenges does Signal Hill India face in 2013?

The market is going to be pretty decent, but not extremely buoyant. But if you're focused on the middle market, the amount of activity continues to be healthy. We have just seven people in the India office, as opposed to 60 in the U.S. Over the next 12 months, we expect healthy deal flow, and a lot of it will be centered around capital raises for high growth companies primarily in the technology sector. We also expect larger deals and a more robust IPO market in the second half of 2013. More opportunities are opening up.

What are the main cultural differences between U.S. dealmakers and Indian counterparts?

Years ago, there was a big cultural difference. Now it's more similar to the U.S. market, but we're still different. If you're an investor or buyer, it's important to build a good rapport with Indian business owners and many Indian businesses continue to be family owned and managed. Also, eight years ago, few companies would take a rational view and act on the right time to monetize and sell. Now, they take a more Anglo-Saxon approach, but there's still more sensitivity around that. The personal connection is more important.

Why is the government slow in improving infrastructure?

The market is slow because, on account of the economic slow-down, there are budget and funding constraints. Furthermore, there has been a level of policy paralysis and many bureaucrats are no longer willing to take a call on large projects. But when the elections happen in 2014, that could bring more stability. In general, between September and December, we've seen an attempt on the part of the government to reform.

How will tax reform in India help dealmakers?

Deal momentum was at its lowest point in the second quarter of 2012 because of certain tax changes that were announced in March 2012 and were to become effective from April 2013 onwards. Those changes were retroactive in nature, and foreign direct investments started to dry up. The government realized this, and so in July when P. Chidambaram returned as finance minister, an independent committee was formed to review these proposed tax changes. This committee has now come up with its recommendations, and the government will likely take the sting out of most of the proposed changes. That should significantly improve the momentum of the country.