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Burger and beans to M&A Funds

Aabhas Pandya

Thanks to the expected deluge of mergers and acquisitions or M&As in corporate India, asset management companies or AMCs are now including M&A funds as the latest weapon in their arsenal. At least two AMCs -- Cholamandalam Cazenove and JM -- will shortly unveil their version of M&A funds.

These funds will primarily capture mergers and acquisitions opportunities created by corporate consolidation. The JM M&A Fund will be part of the three-fund sectoral series and is likely to be launched on April 18. The other two funds of the umbrella fund are Techknowledge Fund and Dot.Com Fund.

The M&A Fund from Cholamandalam will be part of a four-fund sectoral series, the other three being consumer, core and healthcare funds. The minimum investment in both M&A funds is Rs 5,000.

The M&A funds will ride the spurt in share prices that normally accompanies a merger or an acquisition transaction. In case of a hostile takeover -- like that of India Cement taking over Raasi Cements -- or two companies gunning for the same target, these special situation stocks hold strong gain potential.

To broad-base their portfolio, these funds are also expected to zero in on Indian companies like Satyam and Infosys, which are operating on a global scale and picking up firms abroad.

The funds will also invest in companies, which are in the process of de-merging divisions as separate entities in the concerned industry, thereby leading to a re-rating of the stock.

However, M&A stock opportunities can sometimes be a test of patience for a fund manager. And the open-end structure of M&A funds is highly unsuited for such investments.

The fund will be vulnerable to redemption pressure triggered by periodic under-performance by a fund, upsetting a fund portfolio.

The portfolio of an M&A Funds can be diversified and have IT stocks as well, but is more likely to look like a value fund, with beaten stocks in the portfolio. Besides, such stocks may also throw surprises in terms of an M&A transaction followed by slipping stock price.

The M&A funds have the potential to deliver handsome returns but will be heavily dependent on the fund manger's ability to identify and capitalise on such opportunities. M&A funds are unlikely to succeed with a passive strategy of riding stock momentum.

The Indian corporate sector has already seen deals over Rs 100 billion since mid-1999 with the number of deals vaulting from around 15 in 1998 to over 55 in 1999. The merger mania has spread across sectors, ranging from infotech, telecom, media and pharma to cement, aluminium, power, textiles and banking.

After the Times Bank merger with HDFC Bank, a few other mergers are also expected in the banking sector. In aluminium, Hindalco recently acquired Alcan's stake in Indal in an all-cash deal worth Rs 7.38 billion.

In terms of the number of deals, the high-growth infotech sector tops the chart with the biggest of them all being Satyam Infoway's acquisition of IndiaWorld for a staggering Rs 4.99 billion in 1999.

The deal mania is gaining momentum and M&A activity is expected to accentuate in the coming years as companies hive off their unrelated businesses, consolidate operations in their areas of core competence and enhance shareholder value by releasing the value locked in a diversified company or conglomerate.

A number of fragmented sectors, like pharma, are expected to witness consolidation as companies sell out or merge due to high cost of R&D and the onslaught of the patents regime.

Source: Value Research

Mutual Funds

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