Arming for a global onslaught

Written by MG Arun | Updated: Dec 31 2007, 07:51am hrs
Soon after announcing the acquisition of the UKs Corus Plc for $12 billion on January 31, 2007, Tata Group chairman Ratan Tata said, I believe this will be the first step towards showing that our industry can step off the Indian shores to enter an international marketplace and assert itself as a global player.

The acquisition was, without question, a bold move, considering the aggressive bidding war that preceded it and the high costs involved. Tata Steel paid $2.4 billion more than it would have in keeping with the original deal struck in October 2006. Many felt the company paid way too much, but the Tata Steel justified the move by saying that the deal, the second-biggest in the industry after Mittal Steels $38.3 billion takeover of Arcelor SA, helped the Tatas become the fifth-largest steel producer in the world from being a lowly 56th.

Chairman Tatas words proved prophetic as another diversified corporate, the Aditya Birla group, announced in February 2007 that group company Hindalco had acquired Novelis, the largest flat-rolled aluminium maker in the world, for $6 billion. Not just the Tatas and the Birlas, wind power major Suzlon Ltd also proved that Indian Inc is no pushover in the global arena by buying German company REpower for 1.35 billion euros after months of high-profile bidding.

So, are such huge M&A deals here to stay Says Harish PV, partner, corporate advisory services, Grant Thornton, The new and heightened activity is a clear sign of M&As becoming a key strategy for India Inc. There is strong growth in cross-border deals, as India Inc is going with the world, buying up companies. He feels that this is different from the state-led acquisitions in China, where deals are big, strategic in nature for the country and are aided by Beijings significant push. India Inc is going about international acquisitions on its own steam, he says.

According to Grant Thorntons annual deal tracker, in calendar 2007, the total value of deals (M&As and private equity) announced was $68.32 billion, up 143% against $28.16 billion in 2006. The average Indian M&A deal size was close to $ 77 million, while the average Indian PE deal size was around $ 44 million during 2007. Moreover, the total number of M&A deals announced during 2007 stood at 661 with an announced value of $51.17 billion against 480 in 2006 with an announced value of $20.30 billion. Tata-Corus, Vodafone-Hutch and Hindalco-Novelis agreements accounted for 60% of the total cross-border M&A deals during the year 2007.

Ashok Wadhwa, partner & CEO, Ambit Corporate Finance, says the coming years will witness a number of M&As involving Indian and European companies. Several European companies are looking at acquiring Indian companies in a variety of sectors. Information technology is one area that will see a lot of consolidation. Logistics, autocomp and engineering, and media, are the others, says he.

In outbound M&As, too, Indian companies would look at Europe for acquisitions in sectors like automotive, consumer goods, banking and financial services and engineering, according to Michel Payan, global head of M&A of Paris-based Societe Generale Corporate & Investment Banking. There is a likelihood of many management buyouts in 2008, adds Wadhwa.

In a management buyout, a companys managers acquire a large number of shares or all of a company, often seen as a way to ward off aggressive buyers.

The total value of outbound acquisitions was $32 billion against inbound acquisitions worth $15 billion and foreign direct investment of about $16 billion (estimate), according to Grant Thornton. We noticed the trend in 2006 of outbound acquisitions crossing inbound acquisitions and now we are seeing the outbounds exceeding inbounds and FDI put together, says Harish. The company expects the new year to continue the trend of increased activity in cross-border M&As.

The year 2007 were to close with two more big deals involving the Tatas. But that did not happen. Orient Express Hotels spurned an offer from Indian Hotels as it former felt that a deal with the Tatas would erode their brand value, while an announcement on the bid for Ford brands Jaguar and Land Rover would now be made in 2008, say media reports.

With a strong rupee cutting down the cost of overseas acquisitions, a whole lot of corporates, including Mahindra & Mahindra, Godrej Industries and Biocon, are eyeing business opportunities abroad with renewed zeal.

The size of acquisitions will be determined by the strategic intent and synergies involved, and Indian Inc does seem prepared for mutli-billion-dollar shopping abroad.