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THE GIST of Editorial for UPSC Exams : 16 July 2020 Post-Covid, we'll see big-money M&As(The Hindu)

Post-Covid, we'll see big-money M&As(The Hindu)

Mains Paper 3:Economy
Prelims level: Mergers and Acquisitions
Mains level: Role of Mergers and Acquisitions during post-Covid period

Context:

The coronavirus outbreak has significantly impacted economic activity.
The pandemic has left stock markets bleeding and debt markets shunned. Investors, stakeholders and deal-makers are all desperately seeking ways to beat the crisis and experience economic growth and financial gains.
The boom in the M&A deal market last decade, which witnessed several mega transactions, have come to a halt. It is now exhibiting the traditional behaviour seen during economic crises (see charts)
However, everything is not lost in this new age era of start-ups and cash-rich companies. There are opportunities for M&A activity, with strategic deals leading the game.

Structural shift in M&A:

In unprecedented times, M&As turn cyclical in nature. However, post-pandemic, a structural change is expected.
Despite the RBI’s effort to push borrowings by reducing interest rates, corporates are unwilling to venture into organic growth.
A recent Nasscom e-survey underlines that 90 per cent of the start-ups have lost their revenues due to lockdown.
Their cash reserves are depleting, operating costs piling, and supply chains disrupted. Funding options for them are bleak as investors and venture capitalists are looking at ways to exit and cut losses from non-profitable enterprises.
Cash crunch and lack of accessibility to new and large markets have made them ready targets; one may see several distress sales in the coming months.

Possible opportunities:

With all-time low valuations, large companies will seize the opportunity to grow inorganically and prefer the buy over build model.
Seasoned business houses would look for cheaper targets in tech and innovation-driven sectors.
Cash-rich companies that missed novel business opportunities last decade and foreign companies looking for a foothold in India will aggressively go for these beleaguered ventures.
Start-ups and MSMEs operating in crowded spaces and unable to gain scale economies, but which have made impressive strides in areas such as pharma R&D, logistics and tech/cyber security, will be the targets.
Small companies in the IoT and AI space are already attractive targets for large firms.

Challenges:

Mergers and acquisitions, despite being lucrative opportunities for inorganic growth, are not free from challenges.
Currently, comparable transactions may not provide the right yardstick for valuation, and greed to buy cheap will make the negotiations tougher and result in non-completion.
Effective due-diligence owing to lack of proper reporting and complete information on various start-ups would be a daunting task for acquirers. Arranging funds for a deal will depend on liquidity and market conditions.

Way forward:

However, the majority of the deals concluded in this quarter were already in the pipeline and had been firmed up before the Covid outbreak.
Also, with the governmentin April insisting on its approval for any new investments from South-East Asian nations, it may be difficult to get fresh Chinese investments.
Nevertheless, the hope of revival is still there and, therefore, the M&A market needs to be closely watched over the next few quarters.
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Prelims Questions:

Q.1) With reference to the Measles and rubella, consider the following statements:

1. Maldives and Sri Lanka became the first two countries in WHO South-East Asia Region to achieve measles and rubella elimination.
2. In September 2019, member countries of WHO South-East Asia Region set 2023 as target for elimination of measles and rubella.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C