India Inc: beyond the celebrations

Deal season is truly upon us. India Inc is going on an acquisitions spree like never before, whether it is buying companies within India or overseas. For the corporate sector, the stock market and, of course, the investment banking community, all this is particularly good news.

Around a decade ago, companies and even the bigger business groups would not dream of buying companies overseas at this pace to give shape to their growth plans. Restric-tive laws, a less-than-favourable interest rate environment, an economic environment grappling with internal pulls and pressures and an indifferent stock market meant companies were busy thinking of first setting their own houses in order. Today, much of that is behind us. Companies have got their act together, cleaned their balance sheets, cut costs and turned competitive. The government is doing its bit to encourage India Inc to turn globally competitive. Consequently, the stock market is also booming. Banks are competing fiercely to fund India Inc?s global ambitions.

A PricewaterhouseCoopers (PwC) study of M&A activity in India, made public earlier this week, pegs the total figure of such activity at a hefty $6.9 billion in the first half of this year, up sharply from only $2.9 billion during the same period the previous year. Investment bankers, like S Mukherji of ICICI Securities, reckon that outbound investments by Indian companies will be the trend to watch, even as India woos FDI.

So, while domestic M&A activity is also on a high?with deals like UB?s acquisition of Shaw Wallace or Reliance Capital?s acquisitions of Adlabs Films and AMP Sanmar, India Inc going shopping for companies overseas is the future trend. Even an apparently conservative group like the Tatas have gone on overdrive, with VSNL picking up Tyco and later Teleglobe and Ratan Tata making it clear more telecom buys are on the horizon. This apart, Tata Steel, after buying NatSteel, is said to be in advanced talks to buy a South-East Asian company.

But amidst all the rah-rah over India Inc going global, it?s important not to lose sight of the challenges and pitfalls that lie ahead. The biggest test for Indian corporations in their quest for a global playing field could lie in how they address the issue of integrating the new acquisitions with their existing networks and operations. While an overseas company may look like the perfect fit for an Indian one, it?s how well the two are integrated which will hold the key to the future.

Equally important is the normally neglected issue of cultural integration. Indian companies will have to become much more sensitive to local conditions and the local culture of doing business. Even here, the issues confronting them in countries like the US and those in Europe would be far different from those they may face in South-East Asia and China. As they integrate and look to cut costs, there may even be job losses in the acquired companies. And while there may be no Left parties to deal with, there would certainly be repercussions of such decisions. How Indian companies tackle these situations will also hold the key to their future.

The other big test is that of corporate governance. Investment banker-turned-private equity man, Udayan Bose, narrates how, at a board meeting abroad, an Indian director wanted some days to decide whether his statement could be recorded in the minutes of the meeting. But the lady recording the minutes said this wouldn?t be possible. There?s a lesson in this for India Inc: that corporate governance issues need a lot of attention.

Typically, Indian companies will leverage for acquisitions and may seek to fund their interest costs from the acquired company. Again, this is a corporate governance issue.

Then there are issues such as brand-building and distribution channels overseas which Indian companies will need to get right. Already, groups like Tata are chalking global brand-building efforts in countries like South Africa, and these will intensify over time. But a truly global Indian company or group will be one which thinks far ahead and addresses these challenges quickly. And does not lose its way in the revelry and chest-thumping which accompanies buyouts these days.

Integrating the foreign company with Indian operations will be a vital challenge. Cultural integration is also an important issue. Corporate governance will be a test for India Inc as it buys global firms.