Mergers and Acquisitions in India - Tapping into Indo-Japanese Opportunities

In this webinar, we explore the best practices for increasing the probability of success of M&A in India, investment trends for Japanese companies, and the impact of the pandemic on deal-making.

Indo-Japanese Investment trends

Trends:

• FDI shows a growing trend with USD 470 billion invested due to increasing ease of doing business
• Japan is the 4th largest investor with USD 33 billion invested across automobiles, drugs, and pharmaceuticals
• In the last 5 years, there have been approximately around 90 inbound M&A deals valued at around USD 10 billion. Out of this, only 15% of the acquisition deals involved more than 75% stake which means the Japanese prefer Indian promotors in the business
• Larger volume transactions around IT due to investors’ interest in India’s talent and technology acumen. Investments in the consumer sector include in automobiles and equipment to enhance their product portfolio

Initiatives:

• Approximately 50 MoUs signed over 4 years across healthcare, agriculture, defense, infrastructure, etc
• Japanese government allocated USD 221 million to incentivize companies to disperse manufacturing across the ASEAN region
• 12 chosen Japanese Industrial Townships (JITs)sites to develop integrated industrial parks with world-class infrastructure for operations and plug-n-play factories.
• Designing system for manufacturing, R&D in the field of AI under Indo-Japan Digital Partnership and training under Japan-India Institute of Manufacturing
• India-Japan Startup Initiatives: with India being 3rd largest ecosystem of 40,000 active startups, Japan is the 4th largest PE/VC investor with Softbank itself having invested around USD 10 billion

COVID-19 impact and emerging opportunities

Impact:

• Disruption in businesses and their revenue streams across sectors that range from short (telecom, IT) to long term (aviation, tourism) impact
• Changes in consumer preferences - being cautious about spending
• Disruption in logistics and supply chain of raw materials
• Companies are in cash conservation mode and some have shut down
• Investors and skeptical and more vigilant before investing

Opportunities:

• India has the potential to become a global manufacturing hub due to the government’s efforts
• India’s attractiveness for investment lies in its untapped potential of the large consumer market
• Japanese markets have been tapping African markets from operations in India. Post covid era provides opportunities to scale and decentralize their supply chain
• Stressed and non-core asset sales
• Funds infusion in e-health, edutech, banking, insurance, etc.

Valuation and due diligence:

“Clarity regarding ownership and transferring of Intellectual Property developed by JVs should be taken into consideration”
- Tanwir Shirolkar

• Understanding the scope of transactions - why is the company entering India and, what products and markets it plans to enter, and how
• The Joint venture partners should be very clear in terms of monetary and non-monetary contributions across IP, customers, assets, etc.
• The desired shareholding will depend on the contributions made and desired control
• Evaluate business plan - understanding temporary and permanent costs, future cash flows, working capital requirements, etc
• Due diligence across taxes, financial statements, IT, environmental, etc.
• Access to confidential rules and policies to the due diligence team

Addressing commercial exposure

From negotiated value to final agreed pricing, consider the following factors:

• Purchase price adjustments: based on the quality of earnings, working capital, and debt
• Payment mechanism: could be earn-out, deferred payment, salaries, or royalties
• Provisions in definitive agreement: could use ESCROW mechanism, warranties, etc