Mumbai: The strategy of acquiring Indian companies for innovation and entry into new markets seem to have worked well for global firms, despite paying a market entry premium and long integration process for these alliances.
More than a third of the global acquirers are very satisfied with their Indian acquisitions. This is in sharp contrast to how other acquirers rate their takeovers in other locations, according to a study titled Doing deals successfully in India—Lessons from the Dealmakers by audit firm KPMG in collaboration with independent mergers and acquisitions (M&A) intelligence service mergermarket, which is to be released on Monday.
“Of the participants in this study, 35% said they are ‘very satisfied’ with their Indian deal in question while 65% said they are ‘somewhat satisfied’. Globally, only 25% acquirers would say deals were successful and 75% would say they were not,” said Vikram Utamsingh, head, transactions and restructuring and private equity in India, KPMG.
The study is based on 17 inbound M&A deals worth $5 billion in India from 2006, including some of the largest deals in the space of financial services, manufacturing, industrials, telecom, consumer and pharma. KPMG could not divulge the details of these deals, citing respondents’ confidentiality.
Mint has reviewed the list of acquirers.
Acquirers come to India for its domestic market and the innovation capabilities of its companies and not for cost arbitrage as was expected. The primary attraction for acquirers, when investing in India, is the potential of its domestic market and the opportunity to use India as a springboard to access some of the regional South Asian, Middle East and even African markets, cited 82% participants in the study.
The capabilities for innovation that Indian companies have built over the last two decades, especially to serve low-cost value-conscious consumers in the emerging markets, are another key reason for doing deals in India.
“Ours was not a defensive acquisition but an offensive acquisition. We were not looking to reduce our cost, but to expand into new markets. Our acquisition was an opportunity to raise our position in a very strategic country for the development of Asia,” said a European acquirer in the study, who did not want to be identified. The company made an acquisition in the healthcare space.
“Our interest in India is explained not only by the economic growth potential, but also by how the country will change over the next decade. We believe that, as early as 2020, India will become a global leader in education, R&D (research and development), innovation and as a producer of high value-added goods and services,” said another acquirer, who also sought anonymity.
Further, acquirers are seeing revenue upside from either bringing in new products to the Indian market or from building a portfolio of complimentary Indian products both for domestic and international markets.
Long and complicated
The acquisition process, however, is not easy and tends to be long and complicated, even when there is no competitive bidding process. Finding issues with compliance, tax or historical financial performance is common during diligence and these may seem like deal breakers at first, the report cited.
Also, there are only a few truly pan-India companies and most Indian firms, whether privately held or publicly listed, tend to remain tightly controlled by promoters or promoter families.
Their motivations for selling a business can be more complex than a business run and managed by an independent management team, thus making a sell off more difficult, said Utamsingh. Also, there is often a wide gap between an Indian target’s attitude towards compliance and governance and the international acquirer’s expectations. “India is not a quick M&A market, you can assume 12 to 18 months to get a deal done,” Utamsingh said.
Other challenges include obtaining access to credible historical financial statements and a realistic forecast business plan. The ability to determine the sustainability of contractual relationships remains a problem as many a time they are not even written. Participants said unavailability of benchmark data to compare performance against a comparable set in many sectors can be an issue.
“When buying a family company, information systems are not always good. You never know if what you are presented with is a complete picture. It is usually accurate, but whether it is complete is another matter,” said an acquirer, requesting anonymity.
Half of the participants say that the valuation expectations of sellers in India are unrealistic. In India, one needs to pay not only a market entry premium but also an emotional premium that Indian promoters attach to their business. Sometimes sellers will go through the process to discover a price, with no real intention to sell. Also, given India’s attractiveness as an investment destination, capital chasing transactions has historically outstripped the number of viable companies for sale, creating competition and driving up valuation expectations.
An acquisition in India also needs building relationships. It’s not a fly-in, fly-out market, said Utamsingh, adding that having a presence in the market and building relationships with partners helps in sourcing acquisition targets. Of the participants, 59% cited personal relationships as a method of sourcing the acquisition target and most of them had a small base in India prior to the acquisition.
“In the Indian market, things are not as clean as in some other markets. Every acquisition will have some type of compliance issue and you have to do your due diligence to get rid of it as soon as possible,” said another acquirer, requesting anonymity.
In most cases, participants were not keen on joint ventures, except in situations where foreign direct investment (FDI) regulations prevent an outright sale or where promoters are unwilling to divest below a certain threshold. We don’t have a good history of joint ventures (JVs) in India and they often don’t last more than five to seven years, said Utamsingh. “JVs are difficult and one has to pay a lot of capital to get out.”
Post-acquisition integration is the most sensitive and time consuming part of an acquisition in the Indian market. The actual or expected length of time for integration is between one and three years, according to 56% of participants. The key focus during the integration revolved around navigating cultural differences, managing employee expectations from an international acquirer and alignment of management styles.
According to Utamsingh, the Indian market is expected to see an increase in the deal activity. “There would not be many very large deals but there are a lot of mid-market deals. There are more and more sellers in India because of succession issues and change in business plans. The under $200 million inbound deal space is very active,” he said.
In 2012, M&A deals fell to a three-year low, down nearly 61% from 2011 and 138.5% from 2010. The year saw 639 M&A deals worth $26.4 billion, compared with 817 deals worth $42.5 billion in 2011 and 800 transactions worth $62 billion in 2010, according to estimates by VCCEdge, an investment tracker.