Global M&A and PE activities witnessed a slowdown during 2023, marked by a significant decline in both deal value and volume as compared to the previous year. This decline can be attributed to various factors such as rising interest rates, the Russia-Ukraine war, the Israel conflict, the failure of some of the large banks, and recession fears. The broader M&A market in India mirrored this global sentiment. 

Note: Excludes $40 billion HDFC- HDFC bank merger transaction in H1 of 2022
Source: VCCEdge And BDO India Analysis

As depicted in the charts above, 2023 witnessed one of the worst years for M&A and PE. Following a peak in the first half of 2022, both M&A and PE deals experienced a sharp decline, starting in the third quarter of 2022, and it has been persistent throughout the year.  

M&A and PE dropped by 57 per cent (excluding the mega  $40 billion HDFC-HDFC Bank merger in 2022) and 48 per cent respectively in value terms during 2023. However, as may be seen from the chart below, the key decline occurred in mega deals ($100 million+ category). Non-mega (less than $100 million) M&A deals dropped by 29 per cent in value terms as compared to an overall decline of 57 per cent. This indicates that acquirers/ investors were hesitant to write large-ticket cheques.  

Valuations, especially for new-age digital businesses, were significantly impacted. In 2023, Indian M&A and PE transactions were characterised by small-ticket deals. Unlike 2022 or 2021, where there was a significant dominance of digital/ new age tech-driven businesses, 2023 paved the way for increasing the share of deals in the industrial, chemical, healthcare, and similar types of businesses. There was a renewed focus on profitability and the path to profitability as against super growth with significant cash burn. 

The challenging climate in 2023 was largely a result of global factors rather than country-specific reasons. However, the deal climate is expected to improve in 2024, especially after the general elections, driven by the following factors: 

• Emphasis on manufacturing: The ‘China+1’ strategy and the Indian government’s focus on manufacturing have attracted global players to the Indian manufacturing sector. This trend is likely to continue, along with the resultant inbound M&A. 
• Abundance of dry powder with private equity: Private equity holds an abundance of dry powder with dedicated India funds and India-focussed investments waiting to be deployed, reaching peak levels. 
• India’s inclusion in the JP Morgan Emerging Market Global Bond Index: India is expected to see significant inflows because of its inclusion in the JP Morgan Emerging Market Global Bond Index. This would potentially lower the cost of borrowing, helping debt-funded buyouts. 
• Increase in the number of IPOs during 2023: India had a booming IPO market in 2023. The robust performance of this year's initial public offerings (IPOs) has provided a war chest to Indian corporates for further expansions, including acquisitions. Additionally, these IPOs have given good exit opportunities to PE funds, thereby increasing the confidence of limited partners in further investing in Indian PE markets. 
• Green deals: There has been a significant focus on ESG. India has laid significant emphasis on the renewable sector and the EV ecosystem, and adoption is ahead of the initial plans. This sector needs significant capital investments and technological innovations and is expected to see a fair deal of investments and M&A transactions in the coming years. 
• Synergy play between traditional and new age: Traditional players are adopting technology and digital reach as a platform to grow. Digital companies are realising that traditional distribution systems continue to hold significant influence. Some of the digital new age companies are also realising that capital is not as freely available as it was in the past. This provides a significant opportunity for both to use each other’s strengths. Sectors such as financial services and consumer goods would likely see such synergistic M&A being played out. 

India is expected to continue to be the bright spot in the world economy in 2024. It is also expected that 2024 will witness robust M&A and PE markets, especially after the general elections. 

-Authored by Samir Sheth, Partner And Head, Deal Advisory Services, BDO India