Closing the gap on developed countries

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: The most acquisitive deal-maker of them all

India stands out as the one country that is registering a number of outbound deals in excess of the number of inbound deals.

With the exception of the latter half of 2005—when a spurt of activity saw 33 inbound M&A deals closed—deal flows into India from the developed markets have been fairly constant for some time now. However, it is the outbound flow that is most interesting as it is indicative of the current mindset of many Indian companies—grow, acquire and utilise debt facilities to the full.

Outbound deals have been steadily increasing for the past three years, culminating in 32 deals being recorded in the first half of 2007. North America was by far the most popular destination for Indian acquirers, being responsible for 18 of those deals. What is driving this deal activity is the ready availability of debt financing, meaning that most deals involving Indian companies as purchasers are highly leveraged. This raises some concerns over what would happen if the global economy took a turn for the worse, leaving the purchasers with a mountain of debt and insufficient equity to ride out the storm.

For the time being though, banks, investors and institutions are happy to keep on making money available and Indian companies are happy to keep on putting that money to good use.

Growing organically does not appear to be a favoured option for many Indian firms. Call it enthusiasm, call it impatience but there is no denying the Indian desire to establish operations overseas—and to do it quickly, via the acquisition route. Their argument would be that they have the money and are prepared to pay premium prices, so why should they wait? The fear here would be that, in their rush to stake their claim, they end up over-paying for assets.

Indian firms have quickly appreciated the importance of good management as they make these forays overseas. Experience of overseas M&A activity is not something that Indian management teams have in abundance.

In addition, most of the businesses going overseas already require a lot of hands-on management simply to maintain the healthy rate at which they are growing domestically.

Indian firms have, therefore, been sensible on the whole in retaining the management talent which they have acquired, using their expertise as opposed to removing the old guard and attempting to run the new organisation, all on their own.

Returning to the point about how they finance these deals, few Indian companies are listed in the West, meaning that they are unable to offer shares as part of the purchase package, forcing them down the equity/borrowings route. This will not remain the situation indefinitely as more companies will undoubtedly look to secure stock market listings, predominantly in the UK and US, in an effort to improve their access to capital and to allow them to offer cash plus shares in any future acquisitions.