The Hindu Business Line : India Inc on a buying binge

One of the first overseas acquisitions by India Inc. in 2007 which received little or no notice was Mahindra & Mahindra Ltd's takeover of 90 per cent stake in Schoneweiss & Co. GmbH, a family-owned German forgings company with over 140 years of experience in the sector.

Among the top five axle beam manufacturers in the world, the company specialises in suspension, power train and engine parts, and its top customers include the DaimlerChrysler Group, MAN, Scania and Volkswagen. Schoneweiss has three manufacturing plants in Hagen and Gevelsberg, Germany, with a total manpower of 550 people.

M&M is convinced that the acquisition will create a strong European base and will consolidate its position towards becoming a globally significant player in the forgings business.

The Tata-Corus (the Anglo-Dutch steelmaker) $12.1-billion mega-acquisition, which hit the headlines on the last day of January, illustrates that Indian companies used to small deals are now prepared to use their cash mountains for larger acquisitions.

Tata Steel's Corus deal apparently offers the promise of access to high-end European markets combined with low-cost Indian manufacturing.

The Corus acquisition will be India's largest-ever global acquisition that will make Tata Steel the world's fifth largest steel producer with a capacity of about 26 million tonnes and combined sales of $24.4 billion. It is incredible and makes Indians hold their heads high in pride.

Acquisition drive

Indian companies are not just floating in cash; they're almost sinking! And keeping the cash in the bank is not an option, as it generates embarrassingly low returns.

Also, "vulture funds", or the so-called private equity firms that are driving up acquisition prices, could view that cash as a reason to target the company. So, Indian companies are now on an acquisitions overdrive!

With its strong balance sheets, India Inc is able to borrow heavily ahead of transactions, then use the proceeds from subsequent divestitures to pay back debt quickly.

Pharma, information technology, automotive component and textile companies, which are on an acquisition binge in the Continental market, are paying high premiums for companies, sparking speculation that Indian companies are getting aggressive in carving out a presence in Europe.

Riding high on a booming domestic economy and availability of easy international financing, Indian companies have already made overseas acquisitions worth a total of over $16 billion since the beginning of 2006, compared to just $4.5 billion in 2005.

Indian corporate deal-makers face a challenge: Though 70 per cent of major acquisitions fail, it is nearly impossible to build a world-class company without doing deals. So the acquisitions binge will go on.

Current Trends

Mergers and acquisitions worth $10.8 billion involved Indian companies during the first six months of 2006. These included $4 billion spent by Indian companies on 85 overseas acquisitions. Two-thirds of the money was spent on buying European firms. On the flip side, foreign companies bought 34 Indian firms worth $3.4 billion.

The average deal size of Indian M&As has also grown in the past two years. In 2005 it was $32 million. By the first half of 2006, the average deal value was $47 million. In some cases, the deal size was bigger than the acquiring Indian company's revenues

Four years of sustained growth — corporate earnings have increased by 20-25 per cent, on average — have boosted profitability and strengthened the balance-sheets of Indian companies.

Total cash flows for the Indian corporate sector were about Rs 250,000 crore ($50 billion) in 2006.

Flight of Investment

Indian companies are going into Europe, investing and saving European jobs, though there is no dearth of investment opportunities within the country.

The problems in India relate to infrastructural constraints, restrictive labour laws and job security regulations.

Despite the voracious appetite for investments in India, governments, both at the Central and State levels, have failed to put in place non-discretionary, transparent mechanisms for channelling these investments.

The Centre's obscure procedures were apparent from the dearth of transparency concerning norms for acquiring agricultural land for setting up industrial units, especially those located in the Special Economic Zones.

Europe Shifting Eastward

While India Inc. is on an acquisition spree in the Continent, European companies, weighed down with soaring costs of labour and manufacturing, high taxes, apathetic labour laws, stumpy working hours, far above the ground health-care and pension costs, are on a horizontal cross-border consolidation course to create a class of pan-European champions able to compete with their counterparts around the globe. Decision-makers of European "national champions," as well as smaller players, are moving eastward, to grow by way of acquisition and relocation, based on the realisation that they need to increase the scale and geographic footprint of the companies they manage if they are to position them to seize growth opportunities in the principal developing economies, particularly the areas collectively known as BRICET (Brazil, Russia, India, China, Eastern Europe, Turkey).

Getting locked in

Multi-billion dollar deals such as the Corus acquisition by Tata Steel is putting India Inc on the fast lane to be counted among the world's largest corporates.

Tata Steel is already being projected as a sure-shot entry to the next Fortune Global 500 list, following its acquisition of the Anglo-Dutch steelmaker that comes in at the 352nd position.

While we can look forward to more Indian companies on the Fortune 500 list in the years to come, it will be exciting to see how many remain there.

Acquisitions in Europe are like the highly sophisticated chakravyuh (a maze) that involves a legion of the world's best. It is like circles within circles. You can travel inter-dimensionally if you understand it. Only, knowledge, preparation and lucid strategy can liberate you as a palpable winner.

(The author, a former Europe Director of CII, lives in Cologne, Germany. Feedback may be sent to mohan.murti@t-online.de)

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