Predators Abroad

By Knowledge@Wharton | December 15, 2012

Afew years back, when the Tatas took over Jaguar Land Rover for $2.3 billion, the Birlas bought Canada-based Novelis for $6 billion and the Bharti group acquired telecom company Zain for $10.7 billion, experts predicted a rash of Indian takeovers of global assets. It didn’t happen that way as, in a number of deals, the targets proved difficult to assimilate. There was a hiatus. Now, however, Indian companies seem to be back on takeover trail.

In mid-October, the $100 billion Tata Group announced a fresh bid for Orient-Express Hotels. The bid valued the New York-listed Orient-Express at $1.86 billion, and the offer was at a 40% premium over the October 17 stock price. In 2007, the Tatas had mounted a raid on the company but were rebuffed by the management. They still hold a 7% stake in Orient-Express from that abortive attempt. “We are very excited at the prospect of bringing the two great companies and brands together,” says R.K. Krishna Kumar, vice-chairman of Indian Hotels, the Tata Group’s hospitality arm.

The first response from Orient-Express was to say that the offer had significantly undervalued the company. But observers feel this is only the opening gambit. The deal will have to be sweetened further for shareholders to bite. The Tatas are believed to have readied an additional warchest for the acquisition. They have also promised to keep the Orient-Express operations separate from their own Taj franchise.

Many More Deals

While the Tatas worked out new numbers in Mumbai, the Hinduja group announced the takeover of US-based specialty chemicals maker Houghton International Inc for $1.05 billion. In Hyderabad in South India, the little-known Rain Commodities Ltd. informed the Bombay Stock Exchange on October 21 that it had signed an agreement for the purchase of a 100% stake in Rutgers of Belgium. Rutgers manufactures coal tar pitch, and the deal is worth $917 million.

Also in the South, on October 2, the Hyderabad-based pharma major Dr Reddy’s announced that it had reached an agreement with OctoPlus NV, a Netherlands-based specialty pharmaceutical company, for around $35 million. In neighboring Bangalore, leading IT player Infosys had acquired Zurich-based management consultancy Lodestone Holdings AG for $350 million just a couple of months earlier. More targets are being identified as the company tries to buy growth in a difficult market. Infosys is sitting on a cash pile of $4 billion.

Others have announced their intentions of going shopping. Mid-sized IT company Hexaware has been talking about an acquisition in manufacturing software, and consumer products manufacturer Dabur is looking at foreign companies in the healthcare domain.

The Numbers Add Up

These may not be very large takeovers. But it all adds up. If one were to look at just the four major takeovers mentioned earlier, the bill is upwards of $4 billion. This is quite a change from the situation just a few months ago. According to the Ernst & Young (E&Y) Transactions Quarterly report, M&A activity declined 20% in the July-September quarter compared to the corresponding period in 2011. There were 161 deals against 202 deals. Deal value was down even more sharply: $3.4 billion against $6.9 billion. If these four deals go though, it will completely change the picture.

The recent UNCTAD World Investment Report 2012 — “Towards a New Generation of Investment Policies” — gives a mixed picture: “Outflows from India increased from $13.2 billion in 2010 to $14.8 billion in 2011. However, Indian TNCs [transnational corporations] became less active in acquiring overseas assets. The amount of total cross-border M&A purchases decreased significantly. The drop was compensated largely by a rise in overseas greenfield projects.”

The greenfield option has been preferred because too many acquisitions have caused firms considerable headaches. In 2006, Dr Reddy’s bought Betapharm of Germany for $560 million and it had an adverse impact on the company’s finances for several years. In Bolivia, Naveen Jindal’s Jindal Steel and Power has exited the El Mutun iron ore project amid a lot of acrimony. The Karuturi group, once a world leader in cut flowers, is mired deep in trouble in agricultural projects in Africa. And, to use an extreme example, Silverline Technologies, at one time one of India’s top 10 IT companies, went bankrupt after a takeover of Internet company SeraNova. “Everything went against us,” says Silverline chairman Ravi Subramanian. Meanwhile, the company had taken on too much debt, a failing noticed in many Indian takeovers.

Most Big-Ticket Deals Have Worked

But these, some feel, are the normal casualties of the M&A business. “I don’t think all the big-ticket M&As have been bad,” says Amit Khandelwal, national director and partner (transaction advisory services), E&Y India. “The only issue is that they were not yielding the results that were anticipated. Some may still be in the process of turning good. The slowdown in the U.S. and the debt crisis in Europe have had an adverse impact on these acquisitions. We need to give them time. These are strategic acquisitions and may not be profitable or work the way we think they should from day one. They are done with long-term objectives.” It is useful to note that takeovers by bigger business houses have, by and large, worked while smaller companies swallowing smaller prey have run into trouble.

“Some of the earlier cases of overseas acquisitions have not been very positive,” agrees Sanjeev Krishnan, executive director of PricewaterhouseCoopers (PwC) India. “But in many cases it was in companies where the balance sheet did not support the acquisition. Many of the mid-market companies financed their overseas acquisitions through a large proportion of debt, and that didn’t always work out well.”

But what explains the resurgence in outbound foreign direct investment (FDI)? First, the climate at home is not conducive to investment. Interest rates are too high, and the economy has slowed down perceptibly. “When hard cash does not find attractive organic growth venues, it leads to inorganic growth initiatives,” says S. Raghunath, professor of corporate strategy and policy at the Indian Institute of Management Bangalore.

Plenty of Opportunity

Besides, there is opportunity. “The weakening economy in the U.S. and Europe has made acquisitions more attractive to Indian companies intending to expand their market base,” says Raghunath. “There are many small and medium sized companies that are private equity-owned, and they are looking for exits.” Adds Khandelwal: “Indian firms are not facing too much of a liquidity issue to buy firms at a price that they think is right from a long-term objective.” Companies like Infosys have a lot of money on their balance sheets.

The weak rupee — which makes acquisitions more expensive — has not been too much of a disincentive. “While the rupee may be weak, the assets are also available at better prices,” says Krishnan.

And, finally, the imperatives of globalization mean that you must foray abroad or remain a bit player in your own country. “With increasing globalization, it is virtually impossible for any company that wants to be a significant player to not be present globally,” says Krishnan. “So, companies have no option but to go in for overseas acquisitions. Until even a few years ago, Indian firms used to be rather hesitant about the overseas acquisition process, and sellers used to be doubtful if the deals would actually go through. But that has changed now, and Indian firms are a lot more comfortable about their moves.” Sums up Khandelwal: “If you want to become a global company, then you definitely need to have a global footprint.”

Is everybody cheering Indian companies on their shopping trips overseas? There are the malcontents of liberalization: left-leaning political parties, labor, right-wing isolationists – the list is long. And even the Reserve Bank of India (RBI) may be joining the list of those looking to protect domestic interests. In March this year, RBI deputy governor Harun R. Khan told a chamber of commerce meeting that “the level of net outward FDI flows recorded a sharp uptrend at $74.3 billion during 2005-2006 to 2009-2010 as compared to $8.2 billion in the first half (2000-2001 to 2004-2005)…. It needs to be ensured that overseas investments by Indian companies do not crowd-out domestic investments.” If the action starts heating up, expect a new rulebook.