Mumbai: Dutch bank ABN Amro’s head of mergers and acquisitions (M&A) in India, Frank Hancock, has been actively involved in some of the largest deals by Indian companies over the past few years.
In 2006, ABN Amro advised the Union government on the $2.4 billion (Rs9,882 crore) privatization of the Delhi and Mumbai airports. Last year, it advised on three pathbreaking transactions involving Indian companies—Tata Steel Ltd’s $12 billion acquisition of UK-based Corus Plc., GMR Group’s $2.4 billion acquisition of a stake in Istanbul’s second airport, and wind energy equipment maker Suzlon Energy Ltd’s $1.6 billion buyout of Germany’s REpower Systems AG.
ABN Amro’s Frank Hancock
In an interview with Mint, Hancock says a possible recession in the US will prove a blessing for Indian companies this year as it will allow them to conclude transactions at lower prices. But he also warns that some overseas deals will fail because of cultural clashes and the inability of the purchaser to fully extract synergies. Edited excerpts:
Indian companies have been buying assets the past four years. Is the current US slowdown a cause for concern to them?
The total value of Indian mergers and acquisitions rose from about $25 billion in 2005 to $45 billion in 2006 and to $70 billion in 2007, before dropping to $10 billion for the first three months of 2008. Most of this was cross-border in nature, often into Europe. So, while there has been a pause in activity in the past few months, I feel thefundamental rationale for cross-border M&A will continue.
In this worsening global (economic) environment, Indian acquirers are better positioned, as competition for assets from Western companies has come down, as have prices, while private equity has just about disappeared from the market.
In terms of our own business, we currently have an extremely active M&A portfolio with eight or nine live transactions, where most of the clients want to buy assets overseas.
For which sectors will Indian companies look overseas, and for what reasons?
Indian acquirers possess a comparative advantage in metals and mining, auto and auto components, telecom, technology and power (particularly to access fuels such as coal). It’s a big contrast with, say, China, where most outbound transactions have been concluded to secure access to energy.
For Indian companies, the primary reasons for acquiring abroad are labour cost arbitrage, access to markets and access to new technologies.
The major targets have been in Europe, which has now become comfortable with Indian acquirers, encouraged by the exemplary behaviour of Tata and Mittal towards their acquisitions of Corus and Arcelor, respectively. I foresee the US becoming a more important destination for Indian acquirers in future.
But some of these overseas acquisitions can fail if the buyer doesn’t take the management and employees into confidence.
You said some acquisitions may not take off. What are the reasons for this view?
The real test for any acquisition will, in my view, come only after a couple of years, as it takes that long for the synergies to work.
Typically, those synergies are of two kinds: cost synergies, where costs can be taken out of the acquired entity, and revenue synergies, where the combined entity generates higher revenue than the individual companies were able to earlier.
One key reason for the failure of an acquisition is cultural clashes between acquirer and target, which prevent the buyer from getting to grips with the target and fully realizing the deal synergies. In the current scenario, the chances of failure are higher as a recession would reduce the availability of synergies. Acquirers have to take into account the risk of overpaying.
Earlier, most big companies used leveraged buyout structures but seem to be less comfortable with these now, as they are concerned that they may not be able to service their debts...
I would state things rather differently, in the sense that the US downturn has reduced the number of banks that finance such acquisitions. Indian companies are now well capitalized, as many of them raised equity last year, while their debt-equity ratios remain low.
For regulatory reasons, the corporate leverage structure is appropriate for Indian companies to finance an overseas acquisition, and we at ABN Amro (now part of the Royal Bank of Scotland Group Plc.) are one of the few banks with both the experience and the appetite to finance such transactions.
Indian and Chinese companies appear to be the main acquirers from among developing countries. How do their approaches differ from each other?
That’s certainly true. We see that they, together with companies from Russia and the sovereign wealth funds, are becoming a very important force in global M&A. At the moment, Indian M&A overseas has been largely driven by the private sector, while Chinese M&A has tended to be state- sponsored by their national oil companies. Indian national oil companies have not been able to compete due to the country’s more cumbersome government decision-making machinery.
We will see the Chinese private sector becoming more involved, and Chinese state companies will spread their wings beyond energy and compete head-on with Indian strategics in the future.
What about Russia?
The Russian market has been transformed by high commodity prices in the past few years. I believe we will see a number of national champions emerging from Russia and making acquisitions primarily in the metals and energy sectors.
Traditionally, Indian family businesses are attached to their companies and don’t like to sell. Do you see any changes in this behaviour?
This highlights an important difference between Indian and Western companies. Indian companies tend to be listed but are controlled by a promoter group or family, while Western companies that are listed are controlled by institutional shareholders. Traditionally, Indian families have treated their assets as family jewels that they are reluctant to part with. But all this is changing as a younger generation, which has absorbed the philosophy of Western corporate practice, takes control.