What is common among the following: Suzlon Energy Ltd’s $1 billion bid for Germany’s REpower Systems AG; Hindalco Industries Ltd’s $6 billion acquisition of North America’s Novelis Inc.;and Tata Steel’s $12 billion purchase of Anglo-Dutch Corus Steel?
Despite three target countries, billion-dollar price tags and divergent industries, all the three instances exemplify India Inc’s willingness to pay a premium to achieve scale, gain growth momentum and, ultimately, grab a piece of the global market pie.
Suzlon made an offer at a 76% premium over the market price; Tata Steel paid 69% more and Hindalco, 17%. These top companies showed they would not miss an opportunity to grab a cross-border company that fits their strategic goals. After all, if one chance is missed, another might not come for years. And to build the same capability on their own could take more than a decade.
“To get a transformational deal, I believe you would need to pay a premium,” said Rohit Kapur, executive director and advisory head of corporate finance for KPMG India Pvt. Ltd. “With the market dynamic changing so quickly, organic growth seems almost unviable now.”
Investment bankers say there may be a variety of reasons for Indian companies capturing domains across the border. On the micro-level, companies do have direct strategic goals. They are seeking technology capabilities, access to new markets, research and development capacity, new product mixes entry to the inside of a country’s regulatory boundaries,and development of natural resources. But ultimately, it all boils down to gaining size and an international presence. “Scale is only available offshore,” said Gunit Chadha, managing director and chief executive officer, Deutsche Bank India. “There is an inherent need to globalize,” he added. For consumer-driven industries, in particular, Indian companies realize that the domestic market may not yet be ripe, and the next five to 10 years are better spent developing best practices abroad.
Yet, the markets didn’t praise Indian companies for their international prowess. Why? Mergers and acquisitions (M&A) advisors said the conservative market in India historically reacts nervously to risky ventures, but these companies were certainly thinking long-term. If companies aspiring to be at the top, globally, do not make such moves, not only do they miss the opportunity, but their competitors gain momentum.
The Indian markets may have had doubts about these ventures, but that did not keep the Indian companies from going ahead. “It is a confluence and juxtaposition of several forces that are coming together,” Chadha said.
For more than two decades, Indian companies have been cutting the fat from expenses and becoming more competitive. And in the last few years, the availability of low-cost financing and attainment of full investment grade prepared them to take risks today. Many companies are financially sound enough to withstand the worst-case scenario.
With each deal, the Indian business community gets more experience (and more confidence) collectively. Sanjay Bhandarkar, managing director at N M Rothschild & Sons (India) Pvt. Ltd, said the expertise gained by companies involved in high value transactions, has rubbed off on smaller entities, too. Small companies have been sticking to the businesses they understand, are realistic about how to manage the acquisition and are financing sensibly. “They’re not taking on excessive leverage,” he said.
But while many Indian companies feel ready for cross-border M&A, there is a risk of getting carried away. M&A advisors with investment banks, consultancies and in-house teams agree that the two areas to watch out for are valuation and post-merger integration.
“The reality is that the valuation is really not a science,” said Sumant Sinha, president of corporate finance at the Aditya Birla Group. “You need the ability to walk away from a transaction.” Sinha added: “Because there isn’t a defined line on the ground, it is very easy to keep shifting that line and justifying what is good.”
But once the deal is done, the real work begins. The dominant topic at three conferences held in Mumbai in the last month, which drew several M&A heads and CFOs, was integration: It is difficult, ignored and critical to getting value from the transaction. So how do companies handle the melding of cultures, processes and capital?
“I think one thing which we have learnt is that we want to be a local company in the global arena,” said J.J. Irani, director of Tata Sons, about the lesson his company has learned from previous acquisitions that will be applied to Corus Steel. “Take Daewoo in Korea, we left it as a Korean company. When you talk about NatSteel in Singapore, we left it as a Singaporean company.”
In the case of the Daewoo Commercial Vehicle acquisition in 2004, Tata Motors was focused on being a global player in the commercial vehicles sector, but the South Korean employees were more concerned about their next pay cheque, according to Praveen Kadle, executive director, finance and corporate affairs, Tata Motors Ltd. Kadle said it was important to understand these differences and open lines of communication before the deal closed.
The trust that Tata built early in the relationship by understanding people and union issues became critical when the company later had to ask employees to cut costs. Syed Mansoor Ahmad, general manager of strategy and M&A at Wipro Technologies said “Integration has to start from the time you are building the strategy of the M&A.” He gave an example. “We are a statistics-driven organization,” he said. So if the target has trouble showing up at a meeting with figures in hand, there clearly are potential differences. There are two choices when deciding how to integrate: Retain the culture of the acquisition or integrate the two cultures. And an acquirer must decide on the basis of where the synergies come from. But companies still struggle to prioritize integration. Some say it is impractical to spend time blending in a company when the deal itself takes all the time and energy, plus it is can feel like jinxing the deal.
S. Durgashankar, senior vice-president, M&A at Mahindra & Mahindra Ltd, said if you don’t think about all aspects of integration at least during due diligence, “you won’t reap the synergies immediately and you will end up with various problems if you do it later”.
Ignoring integration before the deal closes, particularly in the increasingly complex transactions India Inc seeks, will not only delay a return on investment—in some cases, the expected return on investment may never come.