Kamal Mehta is a freelance journalist based in the UK.
When India's Tata Steel (pictured) bid for the Anglo-Dutch corporation Corus, business magazines trumpeted the arrival of the Indian multinational corporation. A rival bid may yet cause the deal to unravel, but Kamal Mehta explains why the offer is a sign that Indian business has come of age
Fuelled by strong domestic growth, easy terms of credit and a more conducive regulatory environment, overseas acquisitions by Indian companies have been picking up pace over the last few years, with outward acquisitions set to outstrip inward deals for the first time. And the pace is likely to accelerate. According to data provider Dealogic, a record 112 foreign acquisitions were announced in the first nine months of 2006, with a value of $7.2 billion. This was up from $4.5 billion worth of deals in 2005 – itself three times the figure in 2004.
A broad-based survey of Indian companies carried out by Grant Thornton in 2006 found that over 70% of those who have acquired businesses in the last 3–4 years have done so outside of India, and of the more than 70% who plan to acquire companies in the next 3–4 years, 94% expect to do it overseas. "It's not really an option. Many large companies are getting to the stage where they have to be globally competitive. The sustainability of margins is under threat. It is imperative that they grow through outside acquisitions," says Sanjeev Krishan, executive director of PricewaterhouseCoopers in New Delhi.
The M&A activity has spanned a wide spectrum of sectors. Recent headline deals have included pharmaceutical company Dr. Reddy's acquisition of German generic drug maker Betapharm for $570 million, Videocon's proposed offer, together with US private equity fund Ripplewood Holdings, of $725 million for South Korea's Daewoo Electronics, and wind turbine maker Suzlon Energy's $565 million takeover of Hansen, a Belgian maker of gearboxes for wind turbines. Ranbaxy, the largest pharmaceutical company in the country, has been on a buying spree all over Europe and now has seven manufacturing facilities outside India. Bharat Forge, India's largest auto-components company and the world's second-largest maker of forgings for engine and chassis components, has made six acquisitions since 2004 in Britain, Germany, Sweden and China.
Companies in the IT space have also been shopping, but these acquisitions have tended to be smaller and niche-oriented, aimed toward harnessing expertise rather than markets. Industry watchers believe that the deals are set to become larger and, indeed, Azim Premji, chairman of software and outsourcing firm Wipro, said recently that the company was on the lookout for acquisitions in the $50–100 million range.
Ascent of India Inc
What does this flurry of activity mean for the business environment in India? A vast majority of businesses are still controlled by promoter families. While family management was much maligned in the past, the situation is quite different today. In the vanguard of those leading the charge toward global competitiveness have been some of the old industrial houses now run by second and third generations – they have restructured, brought in independent directors and leveraged their expertise in their home markets to propel themselves into global markets.
Take the case of Mahindra and Mahindra, India's largest manufacturer of utility vehicles. Chairman Keshub Mahindra was at the forefront of a group of disgruntled Indian businessmen – all heads of family-controlled companies – who, in the early to mid-1990s, urged the government to offer some protection to Indian business houses threatened by foreign competition. Today, Mahindra's company, together with the other enterprises whose chiefs formed part of this group, has rallied strongly. It has hived off non-core businesses, professionalised management and is forging ahead with strategic acquisitions under the leadership of the next generation.
In some cases, large family shareholdings have actually facilitated swift decisions on mergers and acquisitions and enabled more risk-taking than would have been possible in corporations with more diffuse ownership. And while it is unlikely that the family-centric structure of Indian businesses is going to change dramatically in the near future, the nimbler companies are recognising that the nexus between ownership and wealth generation has to be transformed if they are to grow.
The ascent of India Inc certainly has implications for businesses elsewhere, particularly in sectors such as healthcare, IT and auto components, where Indian companies are looking to acquire global reach. The logic of low-cost production can propel potential takeover targets into the arms of an Indian acquirer. Facilitating this is the fact that attitudes toward India have shifted. The growth of Indian corporates, the success of Lakshmi Mittal – the UK-based Indian-born businessman – and the increasingly visible profile of Indians in positions of corporate leadership – Indra Nooyi at Pepsico, Arun Sarin at Vodafone – have given Indian businessmen greater credibility in the global marketplace. And the know-how gained through grappling with tangled regulations and inefficient market practices on the home turf is likely to have sharpened their management skills.
But perceptions could still be tricky to negotiate. It may be harder for the acquired company to accept managers from another country, especially from a developing country. And this will be particularly true if the acquirer has to make cutbacks. "One fear that they may have is that the Indian company is going to shut down facilities and potentially transport them back to India," says Jacob Mathew, managing director of Mape Advisory Group, a Bangalore-based boutique investment bank.
Cultural issues are not the only ones cross-border acquisitions are likely to face. The credit environment could change, drying up the supply of bank financing. Private equity has so far played less of a role – many business families are leery of any dilution of their shareholding – but this looks likely to change. According to a Bain & Company study, the private equity market attracted $2.2 billion in investment funds in 2005 and will reach, at a conservative estimate, almost $7 billion by the end of the decade.
As financing becomes tougher, says Krishan of PricewaterhouseCoopers, Indian companies will need to focus on scalability and integration to extract value from their cross-border deals. So far, acquisitions undertaken by Indian companies have tended to strengthen existing businesses, rather than transform them. And they have been of a manageable size. But as the deals get bolder and bigger, the potential for problems is magnified. "Many of the big boys could over-leverage and fall on their faces when markets change. There's a lot of hubris around in corporate India," says a London-based investment banker.
So, in the midst of the loud celebrations, a note of caution is necessary. Historically, more mergers fail to create value than succeed at it, and Indian acquisitions are unlikely to be exempt from this forbidding statistic. These are early days for Indian M&A – outbound acquisitions from India account for less than 1% of global cross-border deals. If the Tata–Corus bid goes through as expected, the resultant corporation will either be a validation of India Inc's buying spree or a cautionary tale. But, for now, the momentum is on and the passion and drive that Indian businesses are exuding look unlikely to abate in the foreseeable future.