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India Inc goes global shopping

August 21, 2007
Indian companies struck 550 merger and acquisition deals worth US$55 billion in the first six months of 2007 - already more than the size of M&A deals in all last year - leaving a new Asian imprint whose implications on the global economy raise more interesting questions than clear answers.

Consulting firm PricewaterhouseCoopers, tracking the deals, listed the bigger Indian conquests in North America and Europe, such as Tata Steel gobbling Corus Group for a record $12 billion; Hindalco, flagship company of the Aditya Birla Group, buying out

European giant Novelis, a world leader in aluminum rolling and recycling, for $6 billion; alternative-energy newcomer Suzlon pocketing Germany's REPower for $1.6 billion by outbidding French rival Areva, and Essar Steel winning American Minnesota Steel for $1.65 billion and Canadian Algoma for $1.5 billion.

"Before, it was hard to raise the foreign exchange we needed for our plans," R Gopalakrishnan, head of Tata's international business, told foreign media. In happy contrast now, India's foreign-exchange reserves are worth $229 billion. and the country's money regulators are pushing Indians to invest abroad.

Asia also figured prominently in the India Inc shopping list, with $4.2 billion being invested in the first quarter of the current fiscal for M&As of Asian companies.

The M&A growth is impressive, with India's deals abroad worth $3.68 billion in the first half of 2004, $25 billion in 2005, and aiming to cross $100 billion by end of 2007.

"The Indian merger-and-acquisition scene has exploded," remarked Frank Hancock, managing director of ABN Amro Asia Corporate Finance, advisers to Tata in the Corus deal, in an interview to India's Business Standard.

Industry observers also say Indian companies score over Chinese M&A hunters because of more Chinese companies being partly or fully government-owned.

The traditional typecasting of the Indian mindset as being timid, insular (in earlier orthodox Hindu belief, going overseas was considered "unclean") and lacking in self-confidence has been thrown aside, with Indian corporate raiders eating up foreign companies much larger in size.

Tata Coffee bought out Eight O'Clock, the third-largest coffee chain in the US, for $220 million, similar to how Tata Tea took over Tetley Tea in Britain in 2000. "The Tetley guys just didn't know how to say no to a bunch of furiously determined Indians," remembered one of Tata top executives involved in the deal.

Analysts are attributing the voracious new Indian appetite for M&As to reasons ranging from India Inc being confident of managing global enterprises, a realization that growth has to transcontinental, and friendlier regulatory policies to the huge armory of investment funds. The herd mentality can also be duly credited. If one Indian corporate major flaunts an overseas trophy, rest assured local competition won't rest until its ego is appeased with a similar acquisition.

The confident new aggressiveness from India Inc is in staggering contrast to the early 1980s, when industry patriarchs closed ranks and howled to the government to thwart India-born British corporate raider and philanthropist Lord Swaraj Paul's efforts to take over Indian company DCM Escorts.

Interestingly, Paul said in an interview in 1999 that it was the Reserve Bank of India and its then governor Manmohan Singh, the current Indian prime minister, that reversed policies in 1983-84 and dashed hopes of his UK-based Caparo Group taking over the Indian company.

The US ranks as top hunting ground for Indian Inc, with apex industry body the Federation of Indian Chambers of Commerce and Industry reporting that M&A deals with US-based companies cost $5.1 billion in the April-July period. The FICCI report "Study on Mergers and Acquisitions During April-July 2007-08" listed Tata, Infosys, Essar and Reliance among the busiest acquirers in the United States.

India's respected industrial group Tata led the conquests, investing $2.13 billion to acquire companies in steel, automobiles and the hospitality industry worldwide. In Asia, Tata helped itself to a 65% stake in Vietnam Steel. Singapore too prominently appeared in Indian radars. In Indonesia, Tata Power Co bought a 30% stake in PT Kaltim Prima Coal and PT Arutim Indonesia for $1.1 billion.

In Europe, India Inc favored companies in Germany ($1.52 billion worth of takeover or merger deals), the United Kingdom ($1.2 billion), Italy ($97 million) and Spain ($19 million). South America and Africa entered the Indian M&A shopping list with about $6 million worth of deals this quarter.

In another India M&A report released on August 12, the Associated Chambers of Commerce and Industry (Assocham), in its first Eco Pulse Study, said Indian companies spent $15.3 billion in the first quarter of this financial year, compared with $2.06 billion that foreign firms spent to rake in Indian firms.

"The equation of business relations with the Western countries is undergoing a significant change," observed Assocham president and leading industrialist Venugopal N Dhoot. "Indian business leaders are aiming inorganic expansion through the most industrialized countries of the world."

The impact is mutual, for instance in the evolution of purchase price allocation (PPA), the financial statements and accounting needed to evaluate a targeted company. Consultants with Ernst & Young believe that present Indian accounting systems for acquisitions will have to change to current global PPA standards to keep pace with India's M&A drive.

The M&A appetite also means Indian companies will need 5,000 more vice presidents in the next two years, according to an estimate in Forbes, with India having to import foreign managers as well as export Indian managers to harmonize global operations.

Immediate dampeners could be the increasing loan-money squeeze in the US, which means fewer funds and higher interest will put a brake on cross-border M&As. But the more optimistic economists view the current situation as "dynamic" and say it should not deter the determined raider.

The American Chronicle quoted a Boston Consulting Group study declaring that the next wave of global corporate successes will come from Indian companies "with their low-cost, high-quality products and services".

The bigger challenge is for India to translate these corporate triumphs to wider prosperity, a problem tragically emphasized in Maharashtra, one of India's most economically advanced states, where its debt-ridden farmers are still committing suicide, even after 100,000 of them have killed themselves in the past decade in the state's Vidharbha region alone.