From makers of steel to specialty packaging, world-class Indian companies with sophisticated management are acquiring or merging with U.S. companies
In the U.S., we often tend to equate India with low-cost information technology and call-center resources. But 17 years after economic liberalization began in the world's largest democracy, a new trend is shaping up: Indian companies have become world-class performers and are starting to invest overseas. We've just begun to see their impact in the U.S.
It's not the usual suspects, the IT companies such as Infosys (INFY) and Wipro (WIT). I am talking about firms such as Tata Steel, the world's lowest cost producer of steel; Mahindra & Mahindra, an automaker that's getting ready to introduce a diesel SUV into the American market; and Grasim, a cement and synthetic fabrics maker. Sophisticated management is the secret sauce that is making India's companies shine.
For example, Mumbai-based Essar Global plans to invest $1.6 billion in plant upgrades into Minnesota Steel Industries, which it bought in October 2007. On the Mesabi Iron Range west of Lake Superior, Essar and its American team are building the first complex in the U.S. to include iron mining, ore processing, and steelmaking on a single site. And a few months before Essar's acquisition, another Indian metals giant, Hindalco Industries, spent $6 billion to acquire Atlanta-based Novelis and become the world's largest aluminum rolling company.
Answer to Stockholders
Investors from China and the oil-rich Middle East are also investing in America. So what's different about India? To me, one important factor about Hindalco, Essar, Tata Steel, Mahindra, and others is that these are companies that grew up and matured serving the domestic Indian market while simultaneously battling India's inadequate infrastructure and slothful bureaucracy. At the same time, they have learned to be answerable to (Indian) stockholders and commercial banks in a way that Chinese and Japanese companies have not had to worry about. Their mettle already tested and proven under these demanding conditions, Indian managers have overseen spectacular increases in profit in the last decade. As Indian entrepreneurs and executives become more confident, their skills now exceed the growth potential of the local market, and investing abroad seems very sensible to them.
Chinese outbound mergers and acquisitions are driven by government-controlled entities, sovereign wealth funds, and often by the nationalist desire to acquire control over natural resources. In the U.S. at least, India's outbound M&A is driven by pure capitalist motives and led by investor-owned companies; that has a better chance of economic integration with American values.
In a study released in June, the U.S. India Business Council , a Washington-based industry group, estimates that companies of Indian origin already contribute to the creation and retention of 30,000 American jobs. In other countries, Indian companies also have a good track record in creating jobs. After Tata Tea bought Britain's Tetley Tea in 2002, the new owners did not replace the management team or engage in cutbacks at all for six years. The trade unions at Land Rover and Jaguar also preferred a buyer from India when Ford (F) decided to sell these storied brands and their factories.
Access to Local Markets
To be sure, many Indian companies are value investors. Reliance Communications bought Flag Telecom, a bankrupt undersea cable company for a bargain. But increasingly the motivation of Indian companies is to increase revenues, acquire new customers, build scale, and gain access to local markets worldwide. The largest specialty packaging company in the world, India's Essel Propack built a plant in Danville, Va., driven by the need to be close to customer Procter & Gamble's (PG) Crest toothpaste factory in Brown's Summit, N.C. And when midmarket private equity firm Gryhpon Investors sold Eight O'Clock Coffee to India's Tata Coffee for $220 million, it was a big win for the seller, who held the company for less than three years.
Some Indian companies will surely falter as they venture into American waters. But generally, investors, managers, and employees alike should welcome the widening of the M&A gene pool to include sources from India.
India Business Consultant Gunjan Bagla is author of Business in 21st Century India (Hachette, July 2008) and managing director of Amritt Inc. in Los Angeles.