Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online-views/  Failed acquisitions are not a blot on Indian MNCs
BackBack

Failed acquisitions are not a blot on Indian MNCs

The audacity of these Indian firms is neither in vain nor a waste: going global is a process, a continuum, a vital part of which is learning the ropes

A file photo of Tata Steel UK’s Port Talbot plant. The travails of companies such as Tata Steel, Apollo Tyres, Reliance Industries and Bharti Airtel remind us of how fragile the world of global mergers and acquisitions (M&As) can be. Photo: ReutersPremium
A file photo of Tata Steel UK’s Port Talbot plant. The travails of companies such as Tata Steel, Apollo Tyres, Reliance Industries and Bharti Airtel remind us of how fragile the world of global mergers and acquisitions (M&As) can be. Photo: Reuters

Ten years after Indian companies started venturing out into the world, acquiring companies often much larger than themselves, the promise of globalization’s many rewards seems to have been belied. The travails of companies such as Tata Steel Ltd, Apollo Tyres Ltd, Reliance Industries Ltd (RIL) and Bharti Airtel Ltd all remind us of how fragile the world of global mergers and acquisitions (M&As) can be. In January last year, Suzlon Energy Ltd took a hit on the sale of its German subsidiary Senvion which it had acquired in 2007 for €1.4 billion. Bharti Airtel also sold its towers in Africa after demerging the business from the Zain operations it acquired in 2010 for $10.7 billion; in March, Tata Steel decided to cut its losses and divest its UK assets, which it acquired with the $12.9 billion purchase of Corus Group Plc. in 2007.

Almost every major Indian group which acquired assets abroad in 2000-07 has been forced to sacrifice a part of the money it spent to buy those assets.

During that heady period, in the glow of an economy galloping along at 8-9% and a boom in global commodities, India’s business czars seized overseas assets eagerly. The Tatas picked up Tetley Tea in the UK, Daewoo’s truck manufacturing unit in South Korea, the luxury car brands Jaguar and Land Rover in the UK and of course the big one, the Anglo-Dutch steel maker Corus. Similarly, RIL bought oil and gas blocks in Yemen, Peru, Colombia, and Australia and also invested billions in shale gas assets in the US. The Aditya Birla group coughed up nearly $6 billion to buy out Canadian aluminum maker Novelis Inc. On the back of such large deals, outward foreign direct investment jumped from $1 billion in 2001-02 to $18.6 billion in 2008-09.

With the environment turning adverse following the global financial crisis, a number of these mega deals ran into rough weather. Enough has been written about the unraveling of this gold rush and the reasons for it. Perhaps India’s wannabe multinationals chose the wrong sectors, mostly basic commodities. According to the World Investment Report 2015 by the United Nations Conference on Trade and Development (UNCTAD), the shift towards services FDI (foreign direct investment) has continued over the past 10 years in “response to increasing liberalization in the sector, the increasing tradability of services and the growth of global value chains in which services play an important role". In 2012, services accounted for 63% of global FDI stock, more than twice the share of manufacturing. The primary sector, which is where a lot of investment from Indian companies went, represented less than 10% of the total.

Perhaps they also picked assets with the wrong nationalities. Increasingly, the direction of FDI flows has been to developing countries, largely in Asia. FDI inflows to developed countries fell by 28% in 2014. And in hindsight, instead of large multi-billion-dollar acquisitions, it may have been prudent to test the waters with smaller-sized deals, the much more successful “string of pearls" strategy that some of the smarter companies employed.

But to call the overseas rush of the last decade an exercise in futility, with self-aggrandizement as the only goal, isn’t just harsh, it is also wrong. Bear in mind the pioneering nature of these investments. Ten years after an inward-looking, largely socialist economy, hesitantly opened its doors to globalization, a small clutch of brave entrepreneurs dared to venture out into the most competitive markets of the world, competing with the best, with companies that had decades of global experience. Not since the ninth century, when Indian merchants took their spices and silks to South-east Asia and China, have India’s businessmen been so adventurous. The audacity of these Indian firms is neither in vain nor a waste: going global is a process, a continuum, a vital part of which is learning the ropes. And lessons there have been many. The viciousness of commodity cycles, the complex dynamic (some would say mess) of EU business, the reality of demography-enforced growth contraction in Europe and, of course, the critical importance of getting valuations right in cross-border acquisitions, are only some of them.

Examples of failed M&As abound even among highly developed markets and practiced multinationals: Daimler-Benz AG’s 1998 acquisition of US car maker Chrysler Corp. for $36 billion collapsed in a heap of cultural issues nine years later when it sold off the lossmaker to Cerberus Capital.

The important thing is that such setbacks have not dampened the enthusiasm for looking at markets abroad to de-risk domestic operations. Despite its relative failure with the Zain acquisition, Bharti went ahead and invested in greenfield projects in Nigeria and Uganda in 2014 to strengthen its presence across Africa, whose unsaturated markets are ripe for the picking by early movers.

In 2014, Indian M&A outflows saw a five-fold jump, recovering from a sharp decline in 2013. Average deal sizes are up too. Clearly, corporate India’s appetite hasn’t been affected by the reverses of the past. Indian companies understand that globalization isn’t any more an option but a vital component of any business.

Look at it this way. At the turn of the century, Tata group’s revenue was less than $10 billion, of which 20% came from international business. By 2014-15, a little over a third of the group’s $108.78 billion revenue came from its international operations. That puts the Corus debacle in perspective.

Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 25 May 2016, 01:18 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App