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Acquisition economics | Why India’s hunger for deals shows no waning

Acquisition economics | Why India’s hunger for deals shows no waning

India’s openness to global trade and investments has seen a remarkable increase in recent years. In the year ended 31 March, the sum of money flowing into and out of the country rose to $913 billion (Rs35.9 trillion), or 110% of gross domestic product (GDP).

As late as 1997, annual flows had amounted to only 50% of GDP, says Ajay Shah, an economist at the National Institute of Public Finance and Policy in New Delhi. “India has changed beyond recognition," Shah says.

The progress is perhaps best reflected in the speed with which Indian companies are buying businesses overseas. So far in 2007, foreign acquisitions have amounted to more than $39 billion, a fivefold jump from last year. The biggest purchase this year—and in India’s corporate history—was the $12.8 billion leveraged buyout of Britain’s Corus Group Plc. by Tata Steel Ltd. While a liquidity crunch in the leveraged-loan market could rule out a similar big acquisition in 2008, the smaller deals might be even more numerous next year as the Indian economy, barely affected by the subprime-related credit crisis in the West, continues to power ahead.

India doesn’t have the sovereign wealth of an Abu Dhabi or Singapore, whose state-sponsored funds recently bought large stakes in Citigroup Inc. and UBS AG, respectively. Nor is the overseas expansion of Indian companies spearheaded by government-owned companies looking to capture energy resources. Private entrepreneurs are driving the agenda, with state-owned oil companies making a few small investments, such as Bharat Petroleum Corp.’s purchase this year of a 20% interest in an Australian exploration area in the Timor Sea.

Fight for Jaguar

Just because Indian acquirers have scant links to the state, their journey to Western boardrooms isn’t a cakewalk. Out of the three companies vying for Ford Motor Co.’s Jaguar and Land Rover brands, two bidders—Tata Motors Ltd and Mahindra and Mahindra Ltd—are Indian car makers. A recent report in The Wall Street Journal (which has an exclusive content partnership with Mint in India) cited the head of a US trade body representing Jaguar dealers as saying that the perception of the luxury brand may take a beating if it was owned by an Indian company.

The financial clout of Indian companies has grown to a point where it’s impossible to stop them with snobbery. Last year, Arcelor SA chief executive Guy Dolle had ridiculed the takeover bid by Mittal Steel Co. by saying that the steel made by Indian-born Lakshmi Mittal was like eau de cologne when his company produced perfume. Investors judged the cologne to be good enough to be merged with the perfume.

Survival instinct

Mittal’s success in building the world’s biggest steel empire—ArcelorMittal—with acquisitions around the world has been a tremendous source of inspiration for Indian entrepreneurs. But ambition alone isn’t enough. Several other forces have come together to make Indian acquirers strong contenders for global assets.

The modernization of the country’s equity market and the loosening of capital controls have improved Indian companies’ access to finance, while a strengthening rupee has made overseas assets more affordable for them. At the same time, the import tariffs that protected local manufacturers from foreign competition have come down significantly. The only way domestic producers can now compete is by going global themselves. That is, increasingly, the strategy that even midsized companies are pursuing.

Huge aspirations

Suzlon Energy Ltd, a maker of wind turbines based in Ahmedabad, has seen its assets grow sixfold in two years through acquisitions of Germany’s Repower Systems AG and Hansen Transmissions International NV, a Belgian gearbox maker. The company is now the world’s fifth largest maker of windmills and expects to become the third biggest by 2010.

“The remarkable thing about Indian companies is that they have huge aspirations to be global companies," Tarun Jotwani, chairman of Lehman Brothers Holdings Inc.’s Indian operations, told Bloomberg this month. “They’re extraordinarily confident about buying companies abroad and integrating them with their companies in India. We think the pace will pick up."

Jaya Prakash Pradhan, an economist at the New Delhi-based Institute for Studies in Industrial Development, has found that 75% of the money spent by Indian firms on overseas buys since 2000 has been in manufacturing. By the number of deals, the pharmaceutical industry is the clear leader, followed by transport equipment and chemicals, he says.

Two-way flows

All of these industries are skills-intensive, in line with the core competence of India’s entrepreneurs. Together with computer software, these businesses will continue to be at the forefront of corporate India’s expansion overseas. Meanwhile, foreign direct investment into India will—once the country has better airports, roads and power supply—come to be dominated by labour-intensive industries in which the local business tycoons have acquired very little expertise.

A progressively more open Indian economy may be able to expand even faster than the current 9% pace. That will, in turn, invite more overseas money into India and give more local businesses the confidence to go global.

For investors, India will be equally important as a provider of capital as well as a recipient.

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