Indian Institute of Management, Indore

Written by Tarun Kumar Jain | Updated: Dec 1 2009, 04:09am hrs
If Indian companies were asked this question before 2007, the answer would have been yes. However, things have changed considerably since then. On January 31,2007, Tata Steel acquired Corus for around $12 billion. Corus was four times bigger than Tata Steel in terms of size and, of course, beyond Tata Steels internal budget and resources. The deal depicted the renewed face of Indian economy and emphasised the strength and confidence of Indian companies to acquire targets overseas, thus making policy decisions not just based on budgets but also based on the ability to turnaround business and following the aspirations of stakeholders and management to compete on global benchmarks. The subsequent $6.4 billion acquisition of Novelis by the Birlas confirmed that Tatas acquisition was not a one-off case and Indian companies are thinking beyond their budgets and national boundaries to expand globally. P Chidambaram, the then finance minister, remarked: Indian industry today has the confidence to bid for business abroad, raise resources, purchase and manage enterprises.

Before these acquisitions, it is not that Indian companies were not acquiring, but most of the acquisitions were constrained by budgets. In fact, the policy of most companies were framed by this constraint. However, investment policy decisions changed considerably and company boards started approving global mergers & acquisition for increased global operation, and to gain synergies and domain knowledge from foreign partners. Not only big conglomerates but also small & medium enterprises started abolishing the constraint of budget over aspiration and abilities and firms like Amtek Auto, Sundaram Fasteners, etc, also started acquiring overseas.

Budget constraints started losing their effect in all major policy decisions of corporate boards. One of the reasons in case of Indian companies was easing of capital norms and availability of low-cost credit in the global market. External commercial borrowings, ADRs/ GDRs (American/global depository receipts) and foreign currency convertible bonds were the preferred routes to meet these expansion plans.

However, things turned topsy-turvy with the global financial crisis in 2008 and credit has become expensive. Companies had to borrow at very high interest rates and consequently, the budget again started playing a major role in their decisions. Major expansion plans and hiring were stalled and companies started taking short-term measures like lay-offs and cost-cutting to sustain.

However, companies that continued to make capacity expansion plans and started hiring early to prepare for the recovery will stand apart. Other important thing to note is that even when global companies like GM, Citibank and Lehman were crumbling, Tata Steel and Hindalco managed to weather the crisis considerably well even when the cost of borrowing was high.

While the budget remains an important factor for companies in taking policy decisions, companies that have gone ahead with their expansion plans and are acquiring business enterprises abroad to compete globally will emerge as winners in the long run.

The author is from the 2008-10 MBA batch at IIM Indore and can be reached at tarun.unique.jain@gmail.com