Move over Tatas and Birlas. A new wave of small and midsized ‘
indian manufacturer’ is creating ripples on the global M&A stage.
Even as inorganic growth opportunities within India become scarce, the economic downturn of Europe and North America has thrown up attractive opportunities for acquisitions. An increasing number of Indian companies is making bids — at times audacious — to gobble up overseas firms. So even though it’s the big ticket acquisitions that capture our imagination, the small and medium companies are increasingly riding the M&A wave abroad. As a result, the trend has brought into spotlight budding multinationals from India.
“We are definitely witnessing an increase in outbound transactions by Indian companies over the last couple of months. These companies are from newer segments such as industrial products, chemicals, and even some consumer products brands that are growing steadily within India,” says Ajay Arora, partner, transactions advisory services, Ernst & Young.
Companies are increasingly expanding their markets beyond the Indian borders - either to access new cuttingedge technologies or in search of natural resources. Since January 2010, there have been around 35 overseas deals struck by Indian companies. The figure is comparatively large as against the over 40 deals sealed in entire 2009.
Apart from larger deals, such as Bharti Airtel’s acquisition of Zain Africa ($10.7 billion), Hindustan Zinc’s acquisition of Anglo-American Zinc ($1.3 billion) in Namibia and Jindal Steel & Power’s acquisition of Shadeed Iron & Steel in Oman ($464 million), the landscape is dotted with many small to mid-sized deals like Banco Products’ acquisition of Nederlandse Radiateuren Fabriek of Netherlands ($24 million), Inox India’s majority stake buy in Cryogenic Vessel Alternatives (CVA) of US ($140 million), Crompton Greaves’ acquisition of Power Technology Solutions in the UK ($45 million), Hindustan Construction Company’s acquisition of a 66% stake in Karl Steiner AG ($33 million), among a host of others.
There are many opportunities for Indian companies to globalise across sectors, including the mid-IT space. Africa has witnessed many deals in the consumer products and telecom space. Distressed assets in Europe are now also prime targets for acquisitions. “Six months ago, such an endeavour was not possible for Indian companies due to financing constraints. Today, balance sheets are much stronger and companies are on a better footing to acquire companies overseas,” says Sanjeev Krishan, executive director/partner, transactions group, PricewaterhouseCooper (PwC). Clearly, high interest burden and liquidity crunch are no longer the stumbling blocks in India Inc’s endeavour to make overseas acquisitions. “In 2007, total offshore investment by Indian corporates was to the tune of approximately $32.9 billion. It is fair to say that the transformation of Indian SMEs into Indian MNCs is well underway,” says Bharat Anand, partner, Khaitan & Co, the New Delhi-based firm which helped Suzlon in its acquisition of Hansen Transmission and Inox’s purchase of CVA.
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With CVA being the world’s largest manufacturer of cryogenic transportation equipment, Inox India has secured its position as a global player in the short span, offering total solutions in cryogenic storage, transportation and distribution engineering across nearly 100 countries with exports accounting for almost 60% of its turnover.
There are some companies which belong to larger groups and, by virtue of that, have a global presence. Some of the lesser known or smaller Tata companies too have hit the M&A trail. For instance, TRF, in April, acquired UK’s Hewitt Robins International. Says Rajesh R Jumani, chief marketing officer, Tata Interactive Systems, “In an increasingly flat world, it is often more advantageous to collaborate rather than compete. We can synergise our mutual strengths, reach out to untapped markets or strengthen our positions in a geography, and meet local needs more effectively.”
A few years ago, Tata Interactive Systems, a pioneer in e-learning, acquired Tertia Edusoft’s Germany and Switzerland business.
The acquisitions have acted as a force-multiplier for the company, helping it ramp up the scale of its operations in Europe. “On the other hand, it has also helped us take formerly localised products to a wider, global audience. So it’s mutually beneficial. After all, ultimately all initiatives need to make business sense,” says Jumani.
There is no doubt that the Tatas’ acquisitions of Corus and Jaguar Land Rover, followed by Reliance’s audacious bid for Lyondell Basell and Bharti’s Zain buy, have made small and mid-size Indian companies (SMEs) to venture offshore. Godrej Consumer Products, part of the Godrej group, has made four outbound deals so far this year. The company has said it continues to look out for target companies in overseas markets.
In the pharma space, Avantha Group acquired Pyramid Healthcare Solutions ($20 million) in the US and Aegis acquired Sallie Mae (customer service centre) in Texas. Cheap dollar, foreign loans make global buy attractive
Avantha Group has an established presence in the IT & ITeS space in the US. This strategic acquisition further strengthens its global presence in the niche healthcare solutions sector. On the other hand, BK Birla group set foot in a new continent with Jay Shree Tea & Industries acquiring tea gardens in East Africa.
According to Bala Balachandran, professor of accounting and information management, JL Kellogg, M&A activities will flourish for at least five more years where India will be a global player. “There will be more M&A activity and people will find the best fit strategically. Value migration will take over value proposition,” Balachandran says.
The rationale
An acquisition is an easy way for small and mid-sized Indian companies, particularly specialising in products like cryogenic vessels, graphite plates, gerkins, etc., to establish a foothold abroad, given that they would have to compete with other MNCs. In some cases, an acquisition ensures an offshore presence along with a competitive supply chain. Some like the Godrej group have gained leadership position in the hair colour space in 19 countries across the globe through the inorganic growth route. With deflated valuations of potential target companies, the global recession has thrown up enough opportunities for Indian companies to make outbound deals.
“With the American economy gradually limping out of recession, several businesses set up some time ago are up for sale. Timingwise, this has helped Indian SMEs, which have benefitted from India’s liberalisation in the past 20 years, to acquire these businesses,” says Anand of Khaitan & Co.
The appreciation of the rupee against the dollar, along with the availability of foreign currency-denominated loans has assisted these companies by making foreign acquisitions cheaper for Indian SMEs.
Difficulties faced In the face of it, everything seems hunky dory at the pace
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at which Indian companies are striking deals. However, the road may be riddled with challenges in matters related to corporate governance, competition law, legal risks and cultural fits.
Indian SMEs may be accustomed to a cosy relationship between promoters and non-executive directors. But such issues are treated with much more seriousness in the West. “Indian companies will have to transform their thinking over such issues if they want to be regarded as blue chip investors from emerging markets,” says Anand.
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Moreover, Indian companies are not accustomed to operating in an environment where there is a strong competition regulator. Indian companies are often prepared to take a high degree of legal risk since the judiciary takes a lot of time to address and resolve issues. However, in the West, the judiciary is much more efficient, and courts award actual costs as well as substantial damages on time. Anand feels managers of Indian companies will require training to deal with such issues. Another big challenge is HR. According to Ashutosh Maheshvari, CEO, Motilal Oswal Investment Advisors, “The biggest impediment remains to be able to adapt to the cultural business conditions to operate in the target company’s country.”
“We have seen integration challenges where human resource policies or the processes or systems are different in the two countries and companies find it difficult to integrate them,” says Arora of Ernst & Young.
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Certain legislations and regulations, especially on environment issues, are also much stricter in the western countries as are closure regulations. New companies heading out may also find it difficult to deal with these issues. The quicker they adapt, the better. Avantha Group has an established presence in the IT & ITeS space in the US. This strategic acquisition further strengthens its global presence in the niche healthcare solutions sector. On the other hand, BK Birla group set foot in a new continent with Jay Shree Tea & Industries acquiring tea gardens in East Africa.
According to Bala Balachandran, professor of accounting and information management, JL Kellogg, M&A activities will flourish for at least five more years where India will be a global player. “There will be more M&A activity and people will find the best fit strategically. Value migration will take over value proposition,” Balachandran says.
