The Hindu Business Line : Corporate India goes shopping — And lands smart deals on foreign shores

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Corporate India goes shopping — And lands smart deals on foreign shores

Raghuvir Srinivasan

Given the boom in the economy and the healthy cash generation by most companies, M&A activity was frenetic last year, and is only set to increase.

Year 2006 will go down in India Inc's history as one of the most exciting times on the mergers and acquisitions (M&A) front. It was a year when Indian companies, hungry for growth and flush with cash, went shopping across the globe and snapped up significant and strategic buys across a host of industries.

The bold bid for Corus Group by Tata Steel, whether it proves successful or not, epitomises the spirit and confidence with which Indian companies marched out to conquer markets and capacities on foreign shores. Corporate India spent close to $7 billion (Rs 29,000 crore) in 2006 on cross-border acquisitions, a study by Business Line reveals.

This is 60 per cent of the total M&A activity in Corporate India in 2006; indeed, inbound acquisitions — acquisition of equity stakes in Indian companies by foreign players — was less than $3 billion, of the total of $11 billion spent on M&A deals in the country.

For this study, only acquisitions/mergers by companies are taken into account and investment by private equity funds in Corporate India excluded.

Here are the most interesting observations from the study:

Cash proved to be king as Indian companies dangled their sizeable rupee reserves to bait targets. Almost 99 per cent of the cross-border acquisitions were made with cash, including some of the high-profile ones, such as Suzlon Energy's acquisition of Hansen Transmission, Denmark, for Rs 2,350 crore, and Aban Offshore's buy of 33.76 per cent in Norway's Sinvest for Rs 2,100 crore.

The biggest cross-border deal in the pharma sector yet — Dr Reddy's Labs' acquisition of Germany's Betapharm (approx. Rs 2,600 crore) — was paid for in cash. This is understandable because rarely is stock used as a currency in cross-border deals, except where it is a merger of two companies.

However, Welspun-Gujarat Stahl Rohren put through an interesting deal with Volzhsky Pipe Plant (VTZ), of the TMK Group of Russia, where it formed a JV with the latter to produce large diameter pipes for use in the oil and gas industry. Welspun's 40 per cent stake in the JV was in the form of capital equipment supplied by it while TMK transferred the assets of its large diameter pipe business as its share of the equity.

The pharma, energy, IT, telecom and plantation industries, in that order, were the sectors that saw the highest number of M&A deals. Activity in the pharma industry was boosted by the largest inbound deal in 2006 — the acquisition of a 51.5 per cent stake in Matrix Labs by Mylan Labs of the US at a cost of $736 million (Rs 3,367 crore). Mylan will eventually increase its stake to 71.5 per cent on completion of the open offer to Matrix shareholders. Deals such as Dr Reddy's-Betapharm and Ranbaxy-Terapia helped push the pharma industry to the top of the M&A league, with total deals of a little over $2.2 billion (Rs 9,100 crore).

Pharma companies have been particularly aggressive in scouting for opportunities abroad, driven by considerations such as access to complementary products and molecules and an expanding geographical footprint across new markets.

ONGC's acquisition of equity stakes in a couple of oil blocks in Columbia and Brazil as also Suzlon Energy's acquisition of Hansen helped the energy sector come in second, with deals aggregating Rs 7,000 crore in all. The energy sector, especially oil and gas, will continue to be at the top of the M&A list in the near future as India's oil companies strike out abroad to acquire equity in oil-fields and in refineries and pipelines.

There were only a few high-profile deals in the IT industry but it still came in third, with deals totalling Rs 6,300 crore. R. R. Donnelly's acquisition of equity stake in Office Tiger, the unlisted Chennai-based BPO company, was the most expensive deal, at Rs 1,125 crore ($250 million). Aditya Birla Nuvo's acquisition of Canadian BPO company, Minacs Worldwide Inc was the most significant overseas buy in the IT sector, followed by the $140-million (Rs 600 crore) acquisition of Azure Solutions by Subex.

Interestingly, low-profile players such as United Phosphorus were very active on the M&A front during the year. The company was involved in six of the eight major deals in the chemicals industry and spent more than Rs 1,500 crore in the process of acquiring stakes in overseas players such as Advanta Netherlands and Cerexagri. Inbound deals, at $2.8 billion (Rs 12,250 crore), accounted for about a fourth of the total M&A deals in 2006. Clearly, Indian companies were more active in acquiring targets abroad than the other way round. While the biggest inbound deal was the Mylan-Matrix one, Citigroup's acquisition of a 9.27 per cent stake in HDFC at a cost of $671 million (Rs 3,020 crore) was the most interesting and added to the bullish sentiment in the HDFC stock.

The cement industry attracted maximum attention from foreign players as Holcim began the year by acquiring a 14.8 per cent stake in Gujarat Ambuja for Rs 2,115 crore. It subsequently acquired further equity in the Indian company and its holding in Gujarat Ambuja now stands at a little over 20 per cent.

There were also other smaller but significant deals, such as Germany's Heidelberg Cement's 51 per cent acquisition of Mysore Cement for Rs 450 crore and Ciments Francais's acquisition of Zuari's group's 50 per cent stake in Zuari Cement for Rs 600 crore, making it a wholly-owned subsidiary of itself.

Domestic M&A deals remained in the shadow of cross-border transactions and the most interesting ones here were the completion of the acquisition of Idea Cellular by the A. V. Birla group and the merger between Indian Overseas Bank and Bharat Overseas Bank. There were also a couple of mergers where the RBI played matchmaker, such as the takeover of United Western Bank's operations by IDBI and that of Sangli Bank by ICICI Bank.

While the size and quality of M&A deals were superior compared to the past, the quality of disclosures continued to be below par.

Even some of the bigger companies, such as Tata Tea, Mahindra & Mahindra, and Ranbaxy, failed to come out with full disclosures on important parameters such as payment mechanism and the nature of the acquisition.

For instance, M&M did not disclose details such as the price at which it acquired German company Jeco Holding and Stokes Group of the UK. Ditto for Ranbaxy's acquisition of Ethimed and Tata Tea's acquisition of Czech company Jemca SA and South African company Joekels Tea Packers.

Competition is often cited as reason for companies playing down the details and not revealing too much but this cannot be an excuse for not sharing even the basic details with shareholders.

And now to digest...

After that hearty meal, it is now time for the acquirers to digest the acquisitions. If putting through a cross-border deal is one kind of a challenge, assimilating the acquired outfit is entirely another.

The market and shareholders will watch the assimilation process closely to gauge whether the acquisitions prove beneficial to the acquiring company.

While the first indications of this will be revealed in the annual results for 2006-07 it would be prudent to watch the performance over the next fiscal or two, especially in case of some of the larger acquisitions, such as Dr Reddy's-Betapharm and Suzlon Energy-Hansen.

Meanwhile, given the boom in the economy and the healthy cash generation by most companies, M&A activity is set to increase in the current year. Success by Tata Steel in its bid for Corus may well embolden others to embark on similar ambitious cross-border deals. More excitement certainly appears in store for Corporate India on the M&A front this year.

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Corporate India goes shopping — And lands smart deals on foreign shores