`The Time Is Ripe' For Indian Merger Mania

The subcontinent is awash in takeovers of all sorts

When word seeped out last March that India's Gujarat Gas Co. was up for sale, buyers stampeded to its door. Enron, Shell, Total, British Gas, First Pacific, Bharat Petroleum, and Hindustan Oil Exploration all expressed interest in acquiring the $35 million company, which supplies gas to households in the prosperous state of Gujarat. Eventually, British Gas acquired a 61% stake for $60 million.

India is becoming a hot new hunting ground for deals. Since the Gujarat Gas sale, at least 200 Indian mergers and acquisitions have taken place in industries across the board. In 1997, India's M&A activity was around $800 million, a number that Arthur Andersen predicts will double this year.

EAGER BUYERS. Driving the boom is the progress India has made in opening its economy to global forces. Exposed to competition, India's family-controlled conglomerates are finding they suffer from shortfalls in capital and technology. As a result, many companies are focusing on core businesses and shedding unrelated assets. Foreign companies are also selling to other foreigners or local entrepreneurs. Favorable changes in the securities laws have made these deals even easier.

The sellers are finding eager buyers. Take Ajay Piramal, who has been diversifying away from his family's textile mills into the high-growth area of pharmaceuticals. Piramal has acquired three subsidiaries of foreign drugmakers, including Hoffman-La Roche Inc., and merged them into Nicholas Piramal India Ltd. Its stock has advanced almost 75% since last March.

While some foreigners are departing, tired of bureaucracy and poor infrastructure, others are betting on a boom in India. General Electric Co. has bought out its local partners' stakes in some lighting and medical-equipment businesses. Anglo-Dutch giant Unilever Group's Indian subsidiary, Hindustan Lever Ltd. (HLL), has become the market leader in hair oil and soaps through local acquisitions. In fact, HLL has a full-fledged M&A department.

India's financial services, in particular, have seen a flurry of M&A activity. As the sector undergoes massive reform, smaller players are getting gobbled up. With an eye to cornering India's vast retail banking market, Industrial Credit & Investment Corp. of India (ICICI), the country's premier financial institution, has acquired ITC Classic, the finance arm of tobacco-maker Indian Tobacco Co., a division of Britain's BAT Industries. This has expanded ICICI's investor base by 700,000, useful for its plans to sell mutual funds and insurance. GE Capital has spent $20 million to acquire SRF Finance, a transportation-finance company, to further its plans to capture the consumer-finance market.

SHARE SWAPS. To step up the pace of consolidation deals even more, Uday Kotak, of Bombay investment bank Kotak Mahindra, wants India's public-sector giants to get in the game. "The big deals will come when Suzuki [Motor Co.] or the Indian government wants to sell out of their joint carmaking venture, or when the State Bank of India merges with ICICI. That's the real juice," he says.

Hurdles remain. The lack of consolidated financial statements and stringent accounting standards can make it hard to assess the real value of companies, says Nanda Menon, assistant director at Jardine Fleming India. And, he says, local banks have little expertise in financing deals. Consequently, mergers and acquisitions are largely financed by private means or share swaps. Other deterrents are the 8% duties paid on all asset transfers. And India's pampered labor unions can create delays and complications. Litigation by unions delayed Hindustan Lever's acquisition of Tata's Tomco by nearly six months.

Despite the difficulties, analysts say the merger market will only get bigger as consolidation occurs in telecom, auto parts, cement, steel, and chemicals. "The time is ripe," says Gaurav Dalmia of First Capital, which advises companies on acquisitions. "In three years, M&A will reach its peak in India." Adds Nimish Kampani, chairman of J.M. Financial, which advised Gujarat Gas: "Indians are realizing that buying and selling companies is like buying and selling shares: It's not a bad thing." If it boosts growth and creates jobs, it can in fact be quite a good thing.

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