The Wharton School at the University of Pennsylvania and management consulting firm AT Kearney Ltd, which teamed up to study mergers and acquisitions (M&As) here, say Indian acquirers tend to give more autonomy to acquired firms, usually not trying to change much. Based on the study, which isn’t finished yet, they also predict that even as Indian companies take larger bites, in sectors such as automotive manufacturing and information technology, there will be “counter-defensive” moves with others acquiring the Indian acquirers. After a roundtable with industry and private equity players here, which will also become part of the final report, Vivek Gupta, managing director of AT Kearney India, and Saikat Chaudhuri, assistant professor of management at Wharton, spoke to Mint. Edited excerpts:
Gupta: Right now, even a mid-sized buyer says, ‘I have got so many deals coming at me from North America; investment bankers, distressed guys, looking to offload assets.’ He has an opportunity to be very, very selective.
So the question is, in the euphoria, are they (Indian buyers) going to end up overpaying? Clearly, some examples are happening where Indian companies are overpaying. Traditional valuation multiples are 4-4.5 times Ebitda (earnings before interest, taxes, depreciation and amortization). An unsophisticated company in South India made this transaction at over seven times Ebitda just in the last two months because they wanted to be in this segment. Clearly, they overpaid.
Chaudhuri: High premium per se doesn’t necessarily mean a bad deal, but it means the pressure to realize synergies is going to be greater. (Indian buyers) are being cautious now. One of the things that became apparent is there’s a greater proportion of deals where there is a lot more autonomy (at the acquired company). They have to learn what to do with them. You don’t want to disturb anything initially, figure out where are the sources of value and more importantly, where can the Indian side add value.
Gupta: The Indian company is still learning and feeling their way. I am hopeful that in three-to-four years from now, as the speed and size of the acquisition train moves on, there is a larger sense of what an India-centric MNC looks like.
Chaudhuri: Just like say the Japanese are good at supply management, is there something of that sort (for India)? We hear a lot about how Indian companies are very good at capital deployment—the efficiency of the utilization of resources is phenomenal.
Gupta: Let’s take the automotive sector as an example— a perfect example right now. The Indian and the US economies in that sector are at other ends of the spectrum. So, it makes it very conducive for Indian companies, which are on... a high, to go after the North American auto clients that are on the reverse state of the cycle. So, where earlier companies were targeting niche technologies, customers, now, people are talking about large, tier-I companies.
Chaudhuri: In IT you already see it.
Gupta: And that is because the IT sector has been, for six or 10 years, on the leading edge of this. Indian firms will be major players and that is going to lead to some counter-defensive moves. If you want to be in this sector, you will have to buy Indian companies.