Column : Buying abroad

Written by Jaideep Prabhu | Updated: Sep 30 2008, 03:49am hrs
A particularly impressive aspect of Indias economic performance is the manner in which its firms are internationalising. Hardly a day goes by without news of an Indian firm acquiring some venerable Western brand. This phenomenon isnt limited to the largest Indian companies. Increasingly, smaller Indian companies, such as telecom firms Tulip IT and Kavveri Telecom, are also engaged in strategic acquisitions in countries like Canada, the US and Ireland. So much so that last year alone, Indians firms bought nearly $18 billion worth of western companies.

For Indian firms, like firms everywhere, a global platform offers greater potential for growth. Moreover, those firms that have been successful in the growing domestic market find themselves flush with funds that they can now invest in overseas expansion (unlike prior to 1991 when there were crippling restrictions on how much foreign exchange they could spend on such expansion). Yet, this isnt the whole story. From the perspective of the West, it seems that Indias global success is as much due to a shift in consciousness as the reasons provided above. For the first time in history, Indian firms and their management appear to have world beating self-belief and global ambition.

Can this performance be sustained Over seven decades of research on the performance of acquisitions paints a gloomy picture of the odds involved. The overwhelming conclusion is that, more often than not, mergers & acquisitions end in failure and that, on average, they produce zero gains for shareholders. The statistics are even less favourable for cross-border acquisitions where differences in culture are involved. Are Indian firms likely to buck these trends

My own research suggests that the answer to this question depends on two things: the motives behind the acquisition and who is doing the acquiring.

Too often, the motives for acquisition are wrong. Either the management is pursuing its own agenda of empire building without thinking of the welfare of shareholders or the intention is to asset strip and move on. Too often, little attention is paid to the complementarities that might accrue from the merger. However, if the motives are right, then the acquisition is off to a good start. Among the best motives for acquisition is the intention to acquire complementary assets that will enhance the long-term competitiveness of the acquiring firm. On this score, Indian firms appear to have done well so far. They appear to have picked targets that will add value to their existing assets. Indeed, a good motive is to enhance innovativeness, and this seems to be a primary driver of many Indian acquisitions abroad.

But good motives alone are not enough. Just as important is who is doing the acquiring, specifically what the acquiring firm brings to the acquisition. In a paper with co-authors Rajesh Chandy and Mark Ellis, I find that acquirers with existing depth and breadth of technical knowhow gain the most out of their targets in terms of post-acquisition innovation. The existing depth and breadth of these firms not only helps them choose targets well, it also helps them integrate the know-how of targets with their existing know-how to produce new knowledge.

A similar result holds for the long-term financial performance of acquisitions. In a paper with co-authors Alina Sorescu and Rajesh Chandy, I find that acquirers with existing technological and marketing assets (what we call product capital) create greater long-term shareholder value out of their acquisitions than others do. Firms with high product capital not only select the best targets to acquire but, more importantly, do better at deploying the assets of the target to create post-acquisition shareholder value.

The game of internationalisation is risky and difficult, as is the game of mergers and acquisitions. So far Indian firms appear to have beaten the poor odds. But their continued performance in the long run depends on several factors, not all of which are in their control.

The author is Jawaharlal Nehru professor of Indian business & enterprise, and director of the Cambridge Centre for Indian Business, at Cambridge Universitys Judge Business School