Right time for India Inc to buy companies?
In this issue:
» Consequences of too much debt
» Mobius believes current crisis not so severe
» US is increasingly adopting protectionist measures
» One more big mistake by the UPA government?
» ...and more!----------------------------- Have an enriching Saturday! -----------------------------
Can Europe find a solution to end the current economic crisis?
Will the new economic reforms drive the stock markets?
Are we paying a price for bad democracy?
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But the tide turned and the global crisis wreaked havoc on the economies and markets of countries across the globe, with most in the developed world still struggling to recover. Not surprisingly then, M&A activity by India Inc. has also been on the wane. But there is more to this. It's not just the weak conditions globally that have put a dampener on deals. India, after recovering remarkably well from the global crisis, is now facing a series of headwinds most notably a slowing economy, rising rates and a paralysis in reforms and policy making. Firstpost cites that M&A figures in 2011 have been lower than that in the previous year. Moreover, Grant Thornton's estimates point out that outbound deals this year have fallen rather dramatically to just over US$ 10 bn from US$ 22 bn-plus the previous year. The key here is funding any acquisition. Given the high interest rates and a rapidly depreciating rupee, most Indian companies are choosing to conserve cash and are vary about shopping for companies abroad.
Does that mean that if market sentiments are bullish, India Inc. should go in for a slew of acquisitions? Certainly not, we believe. The strategy that one adopts while acquiring stakes in companies should be akin to that while buying stocks. For starters, companies should acquire only if they believe that the target company is the right fit and will provide various synergies in the future. But more importantly, whatever the market conditions, even if a company has abundant cash or easy access to debt funding, it should not acquire if valuations are expensive. Thus, growth for the sake of growth is a dangerous policy we believe and while a bull run will mask mistakes, a crisis of the sort we have witnessed now will certainly strain balance sheets of most companies, especially those which have made rash decisions on the M&A front.
Do you think that this is the right time for India Inc. to acquire companies? Share with us or post your comments on our Facebook page / Google+ page.
01:28 | Chart of the day | |
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*Cost of sending US$ 200 Data source: The Economist |
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You will be surprised to know that the same logic can be applied to the economies of US and Euro zone. These economies too have brought a lot of future demand into the present and are now staring at the consequences. Fortunately or unfortunately, unlike us lesser mortals, governments like the US have one more option besides defaulting and cutting back. And that answers to the name of printing money. So, come 2012, it will be interesting to see what routes do these economies take. However, if a noted bond manager Jeff Gundlach is to be believed, one should be prepared for both the scenarios i.e. hyperinflation if the Government prints more money and deflation if a default or similar such outcome occurs. Looks like 2012 will be one of the most important years in many years.
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The Bill would also allow US consumers to demand an American representative when they make a call to a call center. If passed, this bill would substantially reduce the off shoring of such call center work by US companies. This in turn would hurt the growth of the BPO (Business Process Outsourcing) centers in India. Though Indian IT companies have been raising their voices against such protectionist practices adopted by the US, they have not been very successful at reversing any of the past decisions as of now. The latest bill would just add to their already growing woes as they are seeing demand slowing down from their biggest markets - the US and Europe.
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First of all the policymakers seem to be living with the myth that giving free food to the poor will solve the problem of hunger and malnutrition in the country. And what about doing the math on how the government will fund the scheme? Well, that has been left to the tax payers to figure out. However, if things were that simple to govern in an economy of 1.2 bn people belonging to diverse social and economic backgrounds, politics would have been the easiest job out there. Throwing the tax payers' money at every problem cannot be the long term solution has been proven enough by the US' government QE schemes. But unfortunately our government has not taken any lessons! Instead of creating jobs, ensuring higher food productivity and reasonable pricing and effective delivery of food grains across geographies, the government is hell bent on straining the lopsided budget even further. We only hope that the gravity of the problem becomes conspicuous to them sooner than we imagine.
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04:56 | Today's Investing Mantra |
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5 Responses to "Right time for India Inc to buy companies?"
Atulya Kumar Nayak
Dec 22, 2011i regularly follow your views. wonderfully all you narrates can be understood to very common man.Thanks a lot. can I post a personal view that should it right time to withdraw the ulip plan that now Nav 10.621 that was bought at 11.63, hope for a suggestion.
R.Varadarajan
Dec 22, 2011There appears to be a synchronised slowdown which may not leave India untouched. The next two years look pretty uncertain what with even IT spend seems to be under cloud.
Money has become scarce and costly. Currency fluctuation risk is also looming large.
This does not seem to be the right time to put precious money into acquistions except for corporates who have low leverage or who are sitting on cash pile.
While the world is not going to come to an end, it would be worthwhile waiting for another quarter or two for prices to move down further (there is anyway no sign of any upmove!).
atul.r.baxi
Dec 22, 2011i am regular follow your views.i donot invest much in stock market, but i like the game as it is played.
taffazull
Dec 26, 2011Giving food to the needy is better than allowing it to rot.This is what the Supreme Court too pointed out.The food that woyuld be given is the food that is now rotting!