BackIndian companies and their overseas blitz
Indian firms are poised to make a mark abroad but must not forget the past
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McLeod Russel, one of the world’s largest bulk tea producers, is looking at acquisitions in Africa and Vietnam to cater to markets in West Asia and Russia. The Rs1,400 crore company is the latest in a series of mid-level Indian firms seeking to acquire assets abroad at a time when the domestic market presents limited growth options. This is a good time to hunt for cheap options abroad especially when the global economy is down. Just last month Apollo Tyres announced a $2.5 billion takeover of New York-listed Cooper Tire and Rubber Co., a company nearly three times its size. Late last year, Hyderabad-based Rain Commodities bought Belgian chemicals maker Rutgers NV from investment firm Triton Partners for €702 million (around Rs4,920 crore) and Wipro acquired Singapore-based skincare and healthcare products company LD Waxon.
And not just companies. The new generation of outbound Indian entrepreneurs has ventured into areas outside the traditional Indian preserve of commodities and energy assets. While three years ago Venkateshwara Hatcheries acquired English Premier League soccer club Blackburn Rovers, for around $69 million, last November, wellness and beauty company VLCC acquired Malaysia’s Wyann International. More recently, Manipal Health Enterprises, the healthcare arm of the Manipal Education and Medical group announced the acquisition of a 70-bed hospital in Klang in Malaysia’s Selangor state.
Undaunted by the mixed success of large conglomerates such as the Tata group, the Aditya Birla group, the Essars and the Jindals, emerging multinationals such as Apollo and Sun Pharma are fuelling a new wave of merger and acquisition (M&A) deals overseas. According to Kroll Advisory Solutions, in 2012 there were 72 outbound acquisitions by Indian firms worth $11 billion, almost twice the $6 billion in 2011. This overseas blitz comes at the expense of action in the domestic market. A recent study by Assocham shows that domestic M&A stood at $1.1 billion in the first quarter of 2013, which is down 78.9% from the first quarter of 2012. Against this, despite global uncertainties, cross-border deals are expected to rise in 2013.
The reasons: the study says that easy accessibility and the low cost of debt capital through financial institutions in the international market is one of the prime factors leading to the maximum number of overseas acquisitions by Indian companies.
With few Western companies having the appetite for acquisitions, there is a flood of cheap money available with banks who are happy to fund this Indian march, driving this new set of Indian companies to punch above their weight (Apollo is half the size of Cooper in revenue terms). Faced with constricting regulatory conditions in India, the new acquirers are eyeing assets overseas both as a source of raw materials and technology as well as a base for reaching untapped developing markets in Africa and other parts of Asia that offer opportunities for growth.
But the risk-return equation is dangerously loaded against first-time aspirants. In 2010, Shree Renuka Sugars purchased a controlling stake in Brazilian sugar company Equipav SA for Rs1,530 crore. Less than a year later, the acquisition cost (debt-funded) had come back to bite the company as it was hit by higher interest rates and foreign exchange losses. The rupee depreciated nearly 10% and the Brazilian real nearly 20% against the dollar, plunging the company into losses. By the end of the year, the stock had plunged over 60%.
Which is why it is essential for Indian businessmen to ensure their acquisitions are not opportunistic in nature, driven purely by the “have money will buy" malaise that afflicted an earlier generation, leading to mindless acquisitions as, for instance, in the auto components space. There is enough to suggest though that the recent purchases are more thoughtful and are part of a continuing plan. Thus, while sheer size makes some deals look spectacular, in truth, companies like Apollo have been building up their global businesses through alliances and direct operations in markets abroad for a few years now. There will, of course, be pain, in so far as debt reduction is concerned and when it comes to integration. But as long as the payback has been calculated keeping in mind the possibility of global downturns that have put paid to the ambitions of Tata Steel and other commodity firms, they should be a good growth bet.
As the global growth momentum shifts to developed economies, India Inc. is poised to make its mark abroad through M&As. It would do well to learn from the failures of the past when hubris and shortsightedness led to a string of botched-up asset purchases.
Have Indian firms learnt something from their previous global (mis)adventures? Tell us at views@livemint.com
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