Past lemons shouldn’t turn India Inc bitter

This column, last fortnight, called upon India Inc to shed its reticence and aggressively invest in growth taking advantage of emerging opportunities offered by Covid-related disruption and realignment of manufacturing capacities out of China.

In Q2 this fiscal, Indian companies, undaunted by the pandemic, did well by sharply cutting costs. But such a strategy, it was argued, had its limitations. Many readers, including promoters and CEOs, reacted to the suggestion by pointing out the flip side of aggression. They cited the example of overseas acquisitions by Indian players in the last decade and a half, most of which have under-performed leaving many saddled with huge debt.

While this may be true, laying the blame simply on aggression rather than a lack of proper strategy for failed acquisitions would tantamount to missing the wood for the trees.

India saw a spate of large-scale global acquisitions post-2005. Tata Steel-Corus, Tata Motors-JLR, Hindalco-Novelis and M&M-SsangYong to name a few. This was the time when the Indian economy was on a roll posting a GDP growth in excess of 8 per cent. Companies were flush with cash and were raring to unleash their global aspirations. Some like Motherson Sumi and Bharat Forge became global players by making a series of acquisitions around the globe. However, in the last five years or so, things have slowed down significantly. For many, dream of a global play has turned into a nightmare.

It was not just the aggression that caused the pain. Most acquisitions lacked proper due-diligence. They failed to anticipate regulatory changes. JLR was investing in a diesel plant when Tata Motors took over and not long there after, diesel power-trains went out of fashion in Europe as new emission norms kicked in. Pharma companies were also similarly stumped by regulatory changes.

Another aspect that Indian companies failed to identify are liabilities during due-diligence. They, eventually, surfaced to haunt them — ask Tata Steel about Corus’ pension liabilities. Some did not understand the scope of warranties and paid the price.

Indian companies failed to map the scenarios well. They were carried away by the low valuations and short payback period that were projected but failed to factor in the worst-case scenario. When the global financial crisis hit, many of these acquisitions went into distress. Indian companies neither planned for it or had the resources to fund for a longer period of time as the payback period got postponed indefinitely. In most instances, Indian players focussed on funding the buy and less emphasis was given for funding the operations post-takeover.

Tata Steel added debt of $6 billion at one point in time due to Corus. Earlier this week, SsangYong failed to repay loans worth 60 billion Korean Won (₹408 crore) to its bankers and M&M may well have to step in and fund the payment. Motherson Sumi and Bharat Forge, too, found themselves heavily over-leveraged as their global acquisitions under-performed. Both had to cut back their growth plans to reduce debt. Bad luck played a part, but one should not forget that global play also means understanding global risks and being prepared for them.

Mindset and culture

Then comes the issue of mindset and culture. Many acquisitions failed or under-performed because the new owners assumed that they knew how to run the foreign entity. Running an Indian company is very different from managing one in, say, Europe or the US. In India, promoters operate on a ‘who you know’ basis while in developed markets it is more on a ‘what you know’ basis. By the time they realised this, damage was done.

There have been instances when Indian IT majors acquired specialised IT services companies abroad and then ended up losing the very talent for which they paid top billing.

All this does not mean that Indian companies should shy away from overseas buys. In fact, they should do a lot more now as opportunities manifest. But they should learn from the past mistakes and approach acquisitions differently. First, they should not fall for low valuation and instead, do a thorough due-diligence. A business’s valuation is low because cost of operating or exiting it is high. It is important to draw-up multiple scenarios and ensure that the acquiring company has the wherewithal to sustain operations even in the worst-case scenario.

Even if you are the best managed company in India, it is always better to approach the acquisition with an open mind and allow the existing management to run the operation even as you understand the local culture. That will ensure that Indian practices are not forced on them. Listening to the local team and workers will help avoid cultural issues and earn trust.

In fact, Indian companies have mastered the art of breaking the trust. They do this by sending a CFO from India to manage the finances of the acquired company. Most times, that is the first move by the Indian management. This sends a clear message that the new owners do not trust the existing team.

There have also been instances where an Indian company acquired a top-end research and development firm in Europe and then sent its head of product development, who was eminently under-qualified compared to the staff there, to man the unit. A flight of talent ensued. It would have helped to get a leader in that field to head that unit but the company tried to save money and destroyed the acquisition. Indian owners’ frugal mindset does not always work.

Workers in acquired companies fear loss of jobs as production could shift to India where costs are low. Cost and other synergies have to be tapped but without upsetting the local team and for that, communication is important. The moment you lose the support of the local employees, the acquisitions begins to under-perform and, eventually, fails.

Most importantly, any acquisition should be on a strong business logic and emotions should play no role in it. In the past, they have happened as companies sought glory or attempted to re-rate their stock in their home market. But the end result has always been quite the opposite.