Over the last few years, Indians have suffered from bird flu, chikungunya and, of late, corporate executives are being bitten by the globalization bug. The media is full of stories of overseas investments by Indian companies, ranging in price from a few million to billions of dollars. Most of these investments have been made in the private sector. These companies’ objectives for overseas expansion can be broadly classified into three categories: to search for raw materials, to gain access to technology, or to gain market share. However, shareholders should be questioning the rationale of some of these acquisitions, looking for a justification other than “keeping up with the Mittals” or the “chalo foreign” euphoria.
One can understand overseas acquisitions by commodity-based firms that need access to mines or pharmaceutical companies acquiring markets or research and development. This is also understandable in the case of business process outsourcing firms, who need to have centres for various language abilities or to dissipate negative publicity from developed markets. But it is difficult to understand the rationale of business houses paying more than the top premium prices for hospitality assets overseas or for gas or power distribution companies to acquire small minority positions in businesses in countries as far apart as China, the Philippines and Egypt.
The Tata group is certainly among the front-runners in becoming the first global conglomerate with its frenzy of overseas acquisitions in all the lines of business it is in. Its strategy calls to mind Cheung Kong Holding Ltd of Hong Kong (the parent company of Hutchison), which is in real estate, telecom, port management, drug stores and oil production, and operates on a global scale.
Based on its initial success in some smaller acquisitions in the steel and auto sector, the group has used some of the liquidity from the listing of its software business to pay premium prices for assets in the other sectors and is now rumoured to be keen to acquire the Land Rover and Jaguar subsidiaries of Ford. According to newspaper reports, acquirers will not be permitted to make job cuts or to relocate any business. Perhaps there is more to what is being reported, but unless the acquirer is able to relocate some of the business and manufacturing to a lower-cost country such as India, it is difficult to understand the enthusiasm.
If the objective is just to acquire a marquee brand name, then perhaps the Chinese with their acquisition of the MG brand or the Malaysian Proton, which acquired Lotus some years ago, or even Tommy Suharto from Indonesia who acquired Lamborghini in 1994 and subsequently sold it to Audi in the late 1990s, have been smarter.
Tata’s strength in the auto sector is in making sturdy cars for developing countries’ roads, and with its plans for making the people’s car, the emerging markets of Asia, Africa and Latin America would be the natural places to expand, rather than paying over the top for faded brand names. The big players such as Nissan and Renault and others are now beginning to focus on this market segment, including in the group’s Indian backyard.
The group has also had a hotel presence in London for many years, but it has not really been regarded as a top tier player in the city. It has now acquired trophy properties in New York, Boston and a marginal one in San Francisco. While all the global chains from the super luxury to the second, third tier are lining up to come to India, where it already has excellent brand recognition and where the opportunities for expansion appear almost limitless in the second and third tier cities, in the lower rating category or even in the resort category, the group is paying top dollar for properties where growth is likely to be in single digits. Should you be investing your capital in a market which is growing in double digits or in a mature market?
Even more difficult to understand is the investment strategy of GAIL, which has acquired small minority positions in gas distribution pipelines in China and Egypt. Similarly, the Power Grid Corp. is reported to be considering taking a 40% participation in a reported $3.3 billion bid for a power transmission company in the Philippines.
With India itself needing billions of dollars for investment in the power and gas supply infrastructure and seeking funds overseas, it is difficult to understand the rationale for these investments.
While one should applaud the strides made by companies in pushing the growth rate of the country, perhaps under the present circumstances, the companies should review their expansion strategies and see where the interest of shareholders are better served. When their own backyard is booming, it seems to make little sense to go looking for unproven greener pastures which might turn out to be AstroTurf.
Avinder Bindra is CEO of Arx Analytics & Advisory Pvt. Ltd. Comments are welcome at firstname.lastname@example.org