The Hindu Business Line : Birlas hit the M&A board

Hindalco's announcement of the intention to acquire Novelis, a US-based manufacturer of downstream aluminium products with facilities spanning North America, is a reconfirmation of Indian Inc's resolve to foray abroad aggressively. What began as a trickle with software companies picking up small information technology companies abroad, and which was followed up by pharmaceutical and auto-components outfits, is becoming a deluge with the Birlas now going the Tatas' way, making a big ticket acquisition.

No matter what the industry is, a common theme running through all acquisitions is just this: Enterprises overseas that are struggling to stay competitive in a global framework will always run the risk of being overwhelmed eventually by their nimbler competitors elsewhere. The pressure exerted in the marketplace is compounded by shareholder expectations of results here and now, forcing managements to seek an acquirer before the continuing under-performance drives down values in the stock market. That many such enterprises are being gobbled up is hardly surprising. Their initial growth was predicated on cheap raw materials sourced from developing countries and products sold to consumers in their home countries where rising standard of living through the greater part of last century meant these companies were able to sell larger volumes at consistently rising prices. But as many developing nations acquired manufacturing prowess comparable to, if not better than, those in the West, the balance of power in manufacturing began to shift to countries such China, Brazil and, more recently, India leading to the increasing presence of the latter set in the cross-border mergers and acquisitions game.

Indian companies are uniquely placed to profit from the global drive towards consolidation. For one, they have successfully weathered the pressures of global competition in many sectors and are thus reaping the benefit of superior returns on their investments. Two, the sustained boom in the stock market (minor hiccups, apart) since the mid-1990s has meant that they have been able to raise resources both from domestic and overseas investors to a point where they now sport some of the healthiest balance-sheets in terms of debt capital seen anywhere among countries wedded to market economy. But none of this would make strategic sense were it not for the fact that the domestic market is providing a huge measure of comfort. A buoyant Indian economy translates into a higher per capita consumption of practically all primary goods be it steel, aluminium or cement. While India may never quite reach the standards of consumption of advanced economies, even a marginal improvement should translate into huge business growth for those with capacities to exploit demand from the vast population emerging into prosperity.

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