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Indian transnationals make waves

Recent trends show they can play the mergers and acquisitions game as well as their counterparts elsewhere

NO SOONER had the ink dried on Tata Steel's successful bid for Corus than there was news of another Indian company coming close to making a spectacular overseas acquisition. A few days after the Tata-Corus merger became public, it was announced that Videocon in partnership with a Belgian company had emerged as a hot favourite for acquiring Daewoo Electronics for a deal value of $700 million. As compared to the Tata-Corus merger, the Daewoo deal is still preliminary but has a very good chance of going through.

Two spectacular overseas acquisitions (or at least announcements thereof) in a time span of a week show that Indian companies are beginning to play the mergers and acquisitions (M&A) game as well as any large multinational from the developed world. That is saying a lot.

Just the beginning

Over the past five years, Indian companies had made global acquisitions for over $10 billion. The Tata bid almost equals this amount. Most of them have averaged $100 to 200 million.

The size of the Tata acquisition suggests that future Indian takeovers could be even larger in size. Also, many of these acquirers may not hesitate to bid for companies bigger than them. Tata Steel is barely one-fourth the size of Corus.

More conducive climate

Until the 1990s, not many Indian companies had contemplated spreading their wings abroad. An Indian corporate or group company acquiring a business in Europe or the U.K. seemed possible only in the realm of fantasy. The reasons why overseas acquisitions are becoming more common are many. The reform era and the march of globalisation have obviously made the environment more conducive.

However, much before the reform era, there had been indications of the more far-sighted among Indian businessmen venturing abroad. The late Aditya Vikram Birla, who already owned an empire in India, had the foresight to go overseas. Not for him to be content with the size and opportunities that existed in the vast and growing domestic Indian market.

Running a business abroad in highly competitive conditions posed special challenges but was equally rewarding. His group had emerged as India's first multinational as early as in the mid-1960s.

Globalisation forever changed the rules of the game. Indian entrepreneurs had gained confidence to compete with well-established multinationals from abroad in the domestic market place.

It was only a matter of time before some of them would shift their focus beyond the Indian shores, not just in selling their products but in setting up manufacturing facilities as well.

A wide gamut

A whole range of companies in fields such as pharmaceuticals, automobile ancillaries, IT, banking and steel have ventured abroad. In general, the factors favouring foreign forays in most cases are the availability of affordable human resources, willing to adapt to the global scenario. Some companies such as Tata Steel are keen on value addition to their abundant raw materials (iron ore), moving up in the value chain and being near their big customers.

The contribution of economic reform at home to the outward focus of companies can hardly be overstated. For instance, the rupee's exchange rate is market determined and all current account transactions have been freed from controls.

Indian companies enjoy substantial freedom to invest abroad even though there is no full convertibility of the rupee as yet. Recent reports of UNCTAD and other organisations have recorded the fact that nowadays foreign direct investment (FDI) is more likely to flow in through cross border mergers (and not through greenfield projects).

Indian businessmen too have, albeit more slowly than those in the West, chosen to invest abroad through acquisitions. The good news is that what started as a trickle in the 1990s, has been growing in size. Today outward fund flows from India almost match those coming in from abroad.

Though relatively new to cross-border mergers, Indian companies seem to have quickly mastered not only the art of deal making but also in learning to adjust to the inter-country differences. The Tatas, who to their credit account for six of the eight top recent overseas acquisitions by Indian companies, evidently command the highest credibility from foreign financial institutions and regulators. Besides, the Corus merger, unlike the Arcelor-Mittal deal earlier this year, was a friendly one. The management of Corus, after a detailed study of several companies across the world, had identified the Tatas as their best strategic fit. Unlike the Mittal deal, there has been no nationalistic political opposition to the Tatas in host countries.

The Indian corporate sector is bound to benefit from the experience of the Tatas and other pioneers.

There is something especially newsworthy in an Indian company buying up the shareholders of major overseas companies located in different countries.

All that will become common as more and more companies join the mergers game. Even the financing of the mergers — a grey area in India at present — may become routine. The Tatas are expected to bring in only a fourth or so of the estimated purchase consideration for Corus whose enterprise value is reportedly $10 billion. The remainder will be funded partly by bank loans that will have as their security against Corus' assets as well as future earnings. That is saying a lot about the credibility the Tatas have in the global financial markets.

Enabling environment

The Tata bid for Corus and many other take-overs succeeded only because the financial systems of the host countries had an enabling environment. Specially noteworthy is the even headed treatment meted out by European regulators when politicians in Luxembourg and France rallied against Mittal's take-over bid for Arceleor. Banks and institutions fund such mergers as part of their routine business. Then there are expert lawyers, investment bankers and other specialists who give the correct advice.

It now seems a matter of time before India becomes an active centre for M&As. Expertise for deal making may not be lacking.

However, for various other valid reasons, India has sectoral caps on foreign direct investment and recently even raised security concerns over investment from some countries. But, being dictated by globalisation, cross-border mergers have become practically unstoppable, although the timeframes may vary.

C.R.L. NARASIMHAN

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