India's Global M&A Boom

Indian corporations, established at home and seeking new markets, are flush with cash and spending it abroad. But have they gone overboard?

Bharti Airtel, India's largest telecom player, is in the midst of talks to acquire a 51% stake in South African telecom major MTN in a deal that could be worth $20 billion. It's unclear whether Bharti's bid will succeed, but plenty of other Indian companies have been on a global shopping spree. On May 1, Essar Steel Holdings announced its third overseas acquisition in a year—the Nasdaq-listed Esmark (ESMK) for $1.1 billion. In March, Tata Motors (TTM) acquired Jaguar and Land Rover from Ford (F) (, 3/26/08). And investment bankers say there are 10 more acquisitions by Indian companies in the pipeline over the next six months.

Why so much merger-and-acquisition activity from India? Thanks to a four-year bull run that yielded stock market returns of more than 40%, a strong rupee, and an easy availability of funds, the Indian corporate sector is flush with cash. In the last two years, corporate India spent over $40 billion on global M&As alone, according to research firm Grant Thornton, compared to $10.84 billion on domestic acquisitions. High interest rates and stock market valuations made local companies less attractive than international ones. In contrast, lower international interest rates made overseas acquisitions more appealing.

The durability of the M&A trend will face a test now, as the fallout from the economic slowdown in the U.S. hits India. The benchmark Sensex index is down 16% this year and the Indian currency has fallen almost 8%, factors that would seemingly make overseas deals less attractive. Still, many analysts and bankers in India say they're confident local companies will continue their global M&A march. The marginal weakening of the rupee will not impact outbound M&As, they say, as U.S. and European assets are still cheap, at one-to-two times multiples compared to three-to-four times multiples earlier.

Moreover, many of the acquisitions so far have fit in nicely with Indian companies' new global strategies. "The early deals have been well received, showing an overall increase in corporate confidence," says Amrit Singh, head of M&A at Deutsche Bank (DB) in India.

Tata Leads the Charge

The acquisitions have been both big and small, across different sectors, some bargains and some trophy deals. Most active has been the Tata Group, the $50 billion private-sector conglomerate. Since January, 2006, Tata has spent a total of $18.75 billion on acquisitions. In keeping with the pattern, local buys were small, numbering just three—a bottler of mineral water, a maker of processed foods, and an operator of pig-iron furnaces—for $225 million. The big bucks were saved for the global plays—21 of them for $18.52 billion, including Tata Steel's Corus for $12.1 billion, and Tata Motors' $2.3 billion spend for Jaguar and Land Rover. Tata has also done smaller overseas deals, such as the acquisition of a coal project in Mozambique for $84 million.

Other Indian industrial groups have been active, too. The Aditya Birla Group's Hindalco paid $6 billion for Atlanta-based aluminium sheet maker Novelis in February, 2007, while Essar Steel forked out $3 billion for Canadian steel maker Algoma Steel, Minnesota Steel, and U.S.-based Esmark in one year. Indian information technology companies like Tata Consultancy (TCS.BO), Infosys Technologies (INFY), Wipro (WIT) and Satyam (SAY) have been buying smaller IT service outfits in Europe, Latin America, and Asia to gain global customers and reduce the reliance on their bread-and-butter U.S. market.

Indian companies are hungry for growth. Having demonstrated their ability to operate in a very competitive home market, Indian managers are looking for new markets that limit their dependence on domestic sales. "In today's markets, companies can't wait for years to build competencies and reach other markets. M&A helps them do all of this in the quickest possible way," says Kavita Thomas, vice-president research at Mumbai-based First Global Securities.

Not the Same as 1980s Japan

But are Indian companies going overboard? So far, analysts are confident that the Indians have avoided going after trophy acquisitions that don't make much strategic sense. "It's not that the Indian companies splurged on outlandish assets, like the Japanese did in the 1980s," says H.V. Harish, a partner at Grant Thornton. While flush-with-cash companies from Japan rushed to buy vital pieces of the American landscape like Rockefeller Center in New York and Pebble Beach in California, Indian corporate houses have been more restrained. Except for a couple of multibillion dollar deals like Corus and Novellis, the average ticket size of the global M&A is around $200 million, providing more value-for-money than vanity buys.

Some acquisitions can be duds, too. Videocon's (VEDI.BO) 2007 attempt to buy Daewoo Electronics came a cropper when it raised price issues with the Korean company's creditors. And some are bold to the point of being overly ambitious. Having failed to take Daewoo, Videocon showed interest in bidding for Motorola's (MOT) handset business "to become a global player," according to Videocon Chairman Venugopal Dhoot, when other heavyweights like Nokia (NOK) and Samsung had held back. Videocon's critics dismissed the move as a publicity stunt.

The acquisitions are adding some much needed froth to the valuations of some companies. By paying affordable "Western multiples to buy and consolidate," companies are getting a higher "Indian market valuation boost," according to Grant Thornton's Harish. The UB Group, with eight listed companies, had barely any standing in India's soaring stock market until two years ago. The stock's performance was way below the galloping local index. Now, with two international acquisitions—Scottish whiskey maker Whyte & Mackay in October, 2006 for $1.2 billion, and French winery Bouvet Ladubay from Taittinger in July, 2006 for an undisclosed amount—and an Indian budget airline (Air Deccan), the UB group's market capitalization has zoomed to $12 billion today, up from just $150 million in 2004. "I had to show the world that I was quite capable of standing on my own feet, making money and creating shareholder wealth," said UB Chief Vijay Mallya soon after the acquisitions.

Spending Gives Pause to Some Investors

All this gorging is bound to result in some indigestion. There are plenty of challenges for the many ambitious acquisitions made by the Indians. Rajeev Gupta, managing director of Carlyle's buyout team in India, is concerned that many of the mid-cap companies making global acquisitions have no experience in plant operation, sales forces, or corporate offices outside their home regions within India. "They will face the difficult challenge of leading the acquired business in a completely new economic, regulatory, and cultural environment," he says. Even the ones that ultimately succeed "will need time to develop a compatible leadership style and community linkages in the new geographies."

Some investors are concerned. In February, 2007, the Novellis acquisition saw Hindalco shares plunge 12% on concerns of profitability and the high price that Hindalco paid. Hindalco has since reported a $265 million quarterly cash profit based after a one-off tax refund. Profitability, however, is still a challenge, confides a senior Birla manager. Auto analysts continue to be skeptical about Tata Motors' Jaguar-Land Rover deal, at least in the short term. Says Ramnath Subramaniam, research head at IDFC-SSKI Securities, "Tata has the management capabilities and skills to handle the acquisitions. But where is the cost rationale of moving manufacturing to India?" To help pay for its acquisitions, Tata Steel recently raised $470 million in the local bond market. On May 15, Standard & Poor's (which, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP)) said the debt offering had not affected the company's BB/stable credit rating but warned of risks ahead. "Medium-term pressure persists in relation to the incremental debt required for funding the company's ambitious expansion plans in India and potentially softening demand conditions in Europe and North America," S&P said in a statement, "which may result in overall weakening profitability and cash flows."

Still, some people argue that Tata-style ambitious M&A is just what India's struggling software-services providers need. When it comes to overseas deals, the country's vaunted IT players have still remained midgets, making bite-sized acquisitions to fill immediate needs for customers with specific needs. "I wish instead of HP, the Indian IT companies had bid for EDS," says Siddharth Pai, partner and managing director of TPI Advisory, referring to Hewlett-Packard's (HPQ) $13.9 billion deal for Electronic Data Systems (EDS), announced May 13 (, 5/13/08). "They are so focused on profitability, that they missed the chance to catapult to the big league."

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