Indian Firms On A Shopping Binge

August 13, 2007
Would your coffee taste any different if the pack reads 'Tata Coffee' instead of 'Eight O' Clock'. Or if your energy drink was manufactured by the erstwhile New York-based Glaceau under the aegis of Tata Sons? Would it matter whether your toothpaste tube is manufactured in Britain or Mumbai, by an Indian packaging firm - Essel Propack or by Arista, UK? Would you mind if the same company was to manufacture catheters and esophageal balloons in the US under the Essel brand?

The spate of takeover bids by Indian companies reached new thresholds in 2006, fortifying India's financial and managerial prowess in the global markets. This wave of acquisitions gained India second place in the global M&A deals this year in the Asia-Pacific region, with a total outbound deal value of $13.5 billion. The Tata Group and its flagship company Tata Steel along with other Indian companies such as Essel Propack, Videocon India, Reliance Industries, Nicholas Piramal India, Shasun Chemicals and Drugs and United Breweries are some of the new brand brigade that the average Westerner is beginning to reckon with.

The newer trend has been for global Indian businesses pitting against each other, as was the case with the Naveen Jindal-promoted Jindal Steel & Power Ltd (JSPL) which recently bagged the $2.1 billion contract for developing one of the world's largest iron ore deposits, El Mutun, along with steel making facilities in Bolivia, South America. Jindal Steel emerged the winner in an international bidding process started by the Bolivian government in May 2006, outbidding Arcelor Mittal. Mahindra USA recently opened a second assembly plant for tractors and a distribution center in Calhoun, Georgia to pick a slice of the rising demand for its tractors in the US markets.

And Tata Coffee's buyout of the third largest coffee chain in the US, Eight O' Clock (EOC), at an estimated US$ 220 million is a case in point where an Indian firm bought out a company abroad that was much larger in size.

Takeovers - Boon or bane

With the melee of Indian corporates acquiring companies in the US and the UK predominantly in 2006, there are bound to be some questions - will these corporates dictate pricing terms through their acquisitions? Does my lifestyle and paycheck go for a toss? Am I going to face the axe again? These fears are but a shadow from the past when the "outsourcing" bug traveled from the American and European markets, crunching jobs in these developed economies.

Also, are these takeovers hostile? Perhaps not, as was proven by Gujarat Heavy Chemicals Ltd (GHCL), an Indian soda ash maker, which recently bought over Dan River Inc., a US-based textiles company. The deal worth US $ 93 million is said to have bailed out Dan River, which had recently emerged from Chapter 11 bankruptcy proceedings.

This time round, trade pundits hint that the Indian takeover bid of companies worldwide is mainly drawn to leverage economies of manufacturing and managerial competencies amongst its takeover candidates. In time, this move is expected to fuel back growth and enhance labor potentials in the developed economies. GHCL acquiring Dan River is but a marketing strategy whereby GHCL proposes to harness Dan River's position as a textile major in the US and utilize its US standing in the western markets for its own retailing contracts, manufacturing capabilities and easy distribution access in the North American markets. Most of GHCLs' production is likely to be outsourced through units in India and China, thus benefiting from cheap labor in these economies.

Small players join the hunt

The interesting fact is that along with corporate bigwigs, low-profile players too are hunting big game on the global front. United Phosphorus was very active in 2006 and bagged six of the eight major deals in the chemicals industry spending more than US$ 339 million for acquiring stakes in companies such as Advanta Netherlands and Cerexagri.

The growing hunger for M&As among Indian companies could also be pegged down to a vast fund supply, globally competitive business practices and a favourable regulatory environment, besides higher margins, revenue, volumes and growth prospects.

Taking heed of these favourable factors are low profile businesses such as Ahmedabad-based Clinical Research Organization (CROs) such as Synchron, Lambda and Veeda seeking overseas opportunities in clinical research, bio-equivalence and data management either through an acquisition or on a greenfield base. Likewise, Mumbai-based CRO, Siro Clinpharm proposes to expand its operational capabilities in the Asia-Pacific regions, Eastern Europe and the US.

Indian companies while looking to turn around sick global entities, are also looking at prospects who are willing to sell off their units voluntarily as was the case with the US $ 8 billion auto parts maker, Dana Corp. Indian companies have in the past acquired several units in the US that had filed for bankruptcy.

In fact, American companies have surfaced as India Inc's largest business partners and received the highest amount of Reserve Bank of India (RBI) approved investments at US $ 225 million between April 2005 and January 2006. In the decade leading to 2005, the United States attracted around US $2,159 million, followed by Russia at US $1,763 million and Sudan with US $964 million, according to a joint report by the Federation of Indian Chamber of Commerce and Industry (FICCI)-Ernst & Young.

Right prescription for growth

The pharmaceutical sector in particular is slated to drive investments and acquisitions overseas. The highly regulated developed economies of Europe and US have become key markets for most Indian companies especially in the generics segment. 2005 saw Avecia's selling off its facilities in the U.K. and Canada to Nicholas Piramal India Ltd. 2006 saw Solutia selling its Swiss operations, CarboGen Amcis, to Dishman Pharmaceuticals and Rhodia selling its U. K.-based Pharma Solutions business to Shasun Chemicals and Drugs.

Most Indian companies bidding overseas now view the possibility of buying out technology or markets through their acquired entities rather than build these from scratch. This was perhaps one of the stances taken by Tata Steel whilst buying out Corus, the Anglo-Dutch steel major. Videocon India's bid for the Korean electronics company, Daewoo in the recent past is a cue to the company seeking markets in East Asia; also gaining access to Daewoo's extended global marketing and sales network. Constant exposure to international markets via the combine entities is yet another ploy to sustain high sales-growth rates globally.

Deal sizes getting bigger

It now seems Indian companies are going westwards as an alternative to maximize businesses in the wake of certain domestic bottlenecks such as the overtaxed transportation and power networks in the country.

With English as the official business language westerners readily reckon with India's free market economy and are learning to understand the demographics and legal systems. Many global companies also have had longstanding joint ventures with Indian firms, adding to the comfort levels while acquiring these companies. Industry watchers believe that Indian companies have an edge over their Chinese counterparts which are either partly or wholly owned by government entities. This could sometimes raise doubts on management's motives for M&A proposals.

In contrast, most private companies in India are independent of such government holdings. This helps reduce protectionism and eases the M&A process. The India-born industrialist, Laxmi Mittal's US $33.5 billion purchase of Europe's top steel manufacturer, Arcelor, in the recent past is perhaps one instance where the Indian government had to intervene to thwart hostile pressures from the French government.

So, how do these deals speak up for India's current financial muscle power? The past two years have seen considerable increase in the average deal size for Indian M&A. As tracked by Grant Thornton, in the first half of 2006, the average deal size enhanced to US $ 47 million as against US $ 32 million in 2005. The period between January to October 2006 saw Indian acquirers close 145 M&A deals valued at US $ 7.8 billion, according to a Grant Thornton report. There were only about 136 such deals worth a total of US $ 4.3 billion in the whole of 2005.

Crossing the seas

Ironically, some deal sizes were bigger than the acquiring Indian company's revenues. Subex Azure is an M&A example wherein the US $ 41 million Bangalore-based telecommunications consulting firm Subex Systems bought out Azure Solutions of the U.K. for US $140 million in April 2006.

The National Venture Capital Association's recent report states that about 13 per cent of all private venture backed start-up companies in the US have been founded by Indian immigrants. With Silicon Valley now represented by high tech Indian born leaders, it does add to investor confidence globally; changing India's image to a Diaspora of "Can do" individuals. Beyond IT and BPO, corporate leaders, the likes of Arun Sarin, CEO, Vodafone, Britain and Indra Nooyi, CEO, Pepsico amongst others perhaps shine forth to proclaim and uplift India Inc. brand to international reckoning.

Investments abroad by Indian companies are expected to surpass foreign direct investment (FDI) inflows into the country for the current fiscal year which is likely to cross the US$ 35 billion mark in 2007. A study by the Boston Consulting Group states that the next wave of international corporate successes will come from Indian companies with low-cost, high-quality products and services. A joint finding by two European investment bodies from France and Germany (Invest in France and Invest in Germany) states, "the FDI outflow from India to the European Union (EU) can cross the US $25 billion mark this year from an estimated US $16 billion in 2006."

Under the circumstance, being annexed by India Inc. might not be that bad after all!