Ratan Tata’s frank statement in a recent interview that the timing of his group’s two marquee global acquisitions was imperfect has two implications. First, it is a remarkably honest admission by an entrepreneur that he was blindsided by the financial storm that hit the global economy after August 2007. Second, it raises broader questions on what went right and what went wrong during the first major globalization push from Indian companies.
“Both the acquisitions were made, I would say, at an inopportune time in the sense that they were near the top of the market in terms of price,” he told The Sunday Times in London, when speaking about the debt-financed purchases of steel maker Corus and the division that makes the luxury Jaguar and Rolls-Royce cars.
Illustration: Jayachandran / Mint
All large business gambles come with embedded risks that are completely clear only with hindsight. But even when these acquisitions were made, there were reasons to believe the Tata group was stretching itself financially though the purchases were routed through offshore special purpose vehicles.
“The media has largely played the role of cheerleader, egging on their champions in a rather bizarre display of corporate jingoism. Unfortunately, the positive spin given to (global) acquisitions, and the hype and excitement surrounding them, has often obscured the risks involved,” we had written in these columns in June 2007.
“The challenge…is to ensure that good targets are acquired cheaply, can be integrated easily and without straining the acquiring company’s balance sheet. In these times of easy money and sky-high valuations, that’s easier said than done,” we had also added.
Everything changed after the credit markets froze in August 2007 and business valuations tumbled. The value of companies bought at the height of the global bull market fell off a cliff, even as interest rates rocketed sky-high. Many acquirers found themselves caught in what now looks like a pincer movement.
It is both easy and unfair to point a finger at those who took the plunge. Let’s face it: India is integrating into the global economy, its leading companies thus need a globalization strategy, and those who lead these companies need to take inevitable risks.
Yet, many of these strategies to globalize were premature and, perhaps, driven by the competitive and hubristic need to own trophy assets.
It is odd that so many Indian companies decided to venture out of a home market that offered handsome rates of growth and returns on capital and into foreign markets that were less attractive in terms of these key financial parameters. Such expansions would have made sense if assets were going for a song, but that was definitely not the case between 2004 and 2007.
Most countries have seen their top manufacturing companies venture out after the home market has started slowing or when competitiveness is threatened. Their banks are hot on their heels as part of what has come to be known as the “follow your customer” strategy.
Most recently, a slowing or high-cost home base is what drove the globalization strategies of Japan in the 1980s (when the strong yen forced its companies to set up production facilities in South-East Asia) and South Korea in the 1990s (when its chaebol planted their flags in other countries at the very end of a 20-year economic boom).
Indian companies moved into the global arena far earlier than these two sets of Asian counterparts. Is that a good thing or a bad thing? There are no easy answers, and a lot depends on individual industry economics and the forces driving global consolidation.
Yet, the record is instructive. Japanese companies took a long time to extract value from their trophy assets, as in the case of Sony’s pricey Hollywood acquisitions. In the South Korean case, an over-leveraged and overextended Daewoo imploded after the 1997 Asian crisis (with its trucks business, ironically, getting taken over by Tata Motors in the aftermath).
But others such as Samsung moved ahead and emerged as true global champions.
In short, global plans driven by expensive acquisitions leave behind clear winners and losers. The next challenge for Tata and his peers is to ensure they do not end up in the losing team.
What mistakes were made by Indian companies pursuing global acquisitions? Tell us at email@example.com