If you can’t lick ‘em, buy ‘em out. That seems to be the strategy India Inc. has been following in its bid to gobble market share, cut costs, acquire talent and, well, establish a global footprint.
A study on mergers and acquisition released recently by the Confederation of Indian Industry (CII) says that the M&A market has been growing at a compounded annual growth rate (CAGR) of 28% between 2002 and 2006.
A large part of this growth came over the last 2 years, with the value of M&A deals increasing from $7.5 billion in 2004 to $21.4 billion in 2006. The total number of M&A deals increased from 343 in 2005 to 480 in 2006. And the scenario is getting better with the year 2007 expected to clock deals worth $50 billion.
Rising cross-border deals
An interesting fact thrown up in the paper is that both inbound (overseas companies acquiring companies in India) and outbound (Indian companies acquiring overseas companies) deals have been increasing. Cross-border M&A accounted for 42% of total M&A deal value in 2002, which increased to 73% in 2006.
What’s more, the share of outbound deals vis-à-vis inbound ones has been increasing. Inbound deals took up 27% of the M&A pie in 2002, against 14% for outbound deals. In 2006, the share of outbound deals at 35%, was almost equal to that of inbound deals.
The average size of outbound deals also improved to $39 million in 2006 from $25 million in 2005, while the average value of inbound deals declined to $108 million in 2006 from $142 million in 2005.
However, the study says the average deal size in India, at $50 million, was half that of the global average at $100 million.
Between 1995-2006, the largest proportion of outbound acquisitions has been in North America, accounting for 32% of total outbound deals. This was followed by Europe with 29%. Europe is now emerging as the prime destination for Indian companies making acquisitions abroad.
The study says while cross-border M&As have been fairly well spread across industries, consumer goods and services, pharma and healthcare and automotive were key sectors.
Pharma companies have been particularly aggressive in scouting for opportunities abroad, topping the M&A league with total deals of over $2.2 billion. The sector also saw the largest inbound deal in 2006 -- the acquisition of 51.5% stake in Matrix Labs by Mylan Labs, US, for $736 million. Other large deals include Dr Reddy’s takeover of Betapharm, Germany’s fourth-largest generic drug maker for 480 million Euros and Ranbaxy’s acquisition of the Romanian Terapia for $324 million.
In the energy sector, ONGC’s acquisition of equity stakes in a couple of oil blocks in Columbia and Brazil and Suzlon Energy’s acquisition of Hansen led the M&A deals. With India’s oil companies striking out abroad to acquire equity in oil-fields, refineries and pipelines, the oil and gas sector, is likely to see more M&A activity.
In recent times the Indian cement industry has seen the entry of global player, Holcim through acquisition of controlling stake in ACC and Gujarat Ambuja.
As a business group Tata has been fairly aggressive in cross border M&A deals across sectors:
The Tata Group’s Global Foray in 2006
|Acquirer||Target||Deal value ($mn)|
|Tata Tea||Glaceau (Energy Brands), US||677|
|Tata Tea||Joekels, South Africa||Not known|
|Tata Tea||Eight O’Clock Coffee, US||220|
|Taj Hotels||Ritz-Boston, US||170|
|Tata Chemicals||Brunner Mond Group, UK||115|
|Tata Steel||Millennium Steel, Thailand||404|
Small ones gobble the big
The study says another notable trend in Indian outbound M&A is the acquisition of global companies much larger in size than themselves. The Tata Group specifically has been the pioneer in this. In February 2001, Tata Tea acquired Tetley, UK. Tata Coffee’s acquisition of the US-based Eight O’Clock, which is around 2.5 times the size of the former, is another such example. Tata Steel’s acquisition of Corus is among the largest outbound deals and also a perfect example of use of leveraged funding for acquisition. Other key large acquisition was by Subex Systems which bought Azure Systems (UK), a company larger than itself (Azure has a turnover of $ 31million against Subex’s revenues of $26 million).
These acquisitions reflect a positive change in the mindset of Indian companies, resulting from greater domestic fundamentals and increased competitiveness. As companies have successfully faced the challenges of competing on foreign turf, they have matured and grown in self-confidence. The risk taking capabilities of the companies has also increased. Significant credit is also due to external factors, such as the government’s policies towards outbound M&A and increase in financing options available to Indian Companies.
The government policy on overseas investment policy has evolved with time. In 2000 FEMA was introduced which changed the perspective of overseas investments. Annual investments up to $100 million were made available without any profitability condition. Companies were allowed to invest 100% of the proceeds of their ADR/GDR issues for acquisitions of foreign companies and direct investments in Joint ventures and wholly-owned subsidiaries. The policies were further liberalized post 2003 wherein the clearance through automatic route allowed Indian Companies to fund to the extent of 100% of their net worth, which was later increased to 200%. As per RBI, the total value of Indian direct investments abroad was $2.7 billion in 2005-061, mainly accounted for by the manufacturing sector.
Higher level in 2007
The M&A activity in 2007 started with a bang with Tata Steel acquiring Anglo-Dutch steel maker Corus for $12.1 billion. Even before the discussions on this deal could settle down, Hindalco announced the acquisition of Novelis for $6 billion. Over the course of February, Vodafone struck a $11.1-billion deal for Hutchison’s stake in telecom operator Hutchison-Essar.
In addition, a string of other possible billion dollar-plus acquisitions could be in the pipeline. For example Reliance Energy, Tata Power and Lanco are evincing interest in the assets of global power company Globeleq --the valuation is pegged $2 billion. Ranbaxy and Cipla are said to be in the race for Merck’s generic business unit, which is again expected to be valued at around $5.2 billion. Tata Power is interested in coal assets in Indonesia which could again cost about $1 billion. Suzlon’s hunt for Germany’s RE power, which could cost about $1.3 billion.
CII’s study on mergers and acquisition: Full Text