Poised to be the world?s next superpowers, India and China lead the ?emerging countries? effort of gaining a foothold into the developed markets with their overseas acquisitions .
Both countries come second only to Australia that has proved to be the most acquisitive nation. However, in Asia, the Tiger seems to have stolen the march over the Dragon on the global Mergers and Acquisitions (M&A) front. While the first half of 2007 saw India inking 32 outbound deals (into the developed markets), China did less than half the number of deals at 14, according to KPMG?s Emerging Markets International Acquisitions Tracker.
The Indian companies appetite for foreign companies seems to be only growing, and that too at a furious pace. India clocked a total of 164 outbound deals worth $30.8 billion between January to August this year. In comparison, there were a total of 190 deals worth $8.6 billion for the whole of last year. Of these, 70 deals were struck in Europe (valued at $3.6 billion) while North America accounted for 71 deals ($2.1 billion). In August 2007, the country struck an average of two M&A deals per day.
As Indian companies break and rewrite their own rules and the Indian economy plays catch up with China, this development is being seen as a significant landmark. So far this year, India?s spends on M&As outside the Asia Pacific region have grown faster than China at 126%. The latter posted a growth of 82%, points out a report by Dealogic.
It is indeed interesting to look at trends that these numbers signify, especially for the two Asian giants ? China and India. Amidst many similarities, the biggest difference is that while the Chinese acquisition spree is mostly State sponsored, in India it is driven mainly by the private sector. The different in the anchors of the two countries plays a decisive role in the choice of their target countries and sectors.
The second key difference lies in the choice of geography. It is the European and the American territories that are seeming to be more attractive for India Inc. According to the data compiled by Grant Thornton, UK alone accounted for 45% of the combined value of all the deals so far in 2007. North America accounted for roughly 39% of the deal value. While Europe led in value, North American was ahead in terms of volume. The North American territory witnessed 68 deals as compared to 55 deals in Europe.
The reason for the mismatch in the proportion between number and value lies in many M&A deals on the North American territory being small ticket. These deals are largely concentrated within the IT and Pharmaceutical sectors. US being the largest market for IT companies is particularly hot for the Indian IT companies.
On the other hand, proximity to the country, the alikeness of language (English) and the historical connection are some of the advantages that Europe has. ?United Kingdom (UK) is closer to us, also there are common figments like laws and regulations which are quite same because of the British days in India. Better understanding of rules there makes it easy for Indian acquirers,? says Sanjeev Krishnan, Executive Director, Pricewaterhouse- Coopers.
If developed destinations like the US and UK are finding favour with Indian companies, with China it is a mix of both developed and developing. Moreover, it is the quest for minerals and energy resources that are fuelling Chinese acquisitions. Given their preference, Chinese are on the look out for natural resources that are easily available in developing nations. A case in point is the $18.5 billion bid by China National Offshore Oil (CNOOC) to buy the California-based oil giant Unocal, which failed due to public and political upheaval over the company?s foreign ownership. China is very active in Africa for mining projects. Also, government owned China National Petroleum Corp controlled PetroChina entered into a strategic agreement with Sudan and has been developing oil fields there since 1996 which proves the country?s thirst for oil.
On the other hand, India too is buying companies in the oil and gas sector but not on the same scale as China. In India, state owned ONGC is one of the major acquirers with its foreign investment arm, ONGC Videsh (OVL) having 26 E&P (Exploration and Production) projects in around 15 countries. However, in this regard Indian companies are not as aggressive as their Chinese counterparts.
?Whenever there is a bid for blocks, Chinese companies always have the higher bid as compared to India. They are more aggressive in this sector,? says Rohit Kapoor, Executive Director, KPMG. By showing more aggression in the field of acquiring natural resources, Chinese are aiming at getting access to energy resources that could be used to support the economic growth back home. Considering that oil and gas is one sector that will play a decisive role in future world economics, India needs to play extreme catch-up here.
According to a PwC report, ?Chinese outbound investments increased to US$14.1 billion in 2006 with 61% of deal value related to acquisitions of oil and gas companies in Russia, Kazakhstan, Nigeria and Singapore.? On the other hand, driven by the Indian promoter culture, Indians are acquiring companies across a broad range and are looking at acquiring everything from skill sets, manufacturing facilities to distribution value chains. Going forward, destinations like Continental Europe and even other countries like Columbia, Mexico, Argentina, islands in the West Indies etc could become attractive.
While Continental Europe is fast emerging as a hub due to the rise of the euro against the dollar, the charm of natural resources along with cheap manpower is what is beckoning Indian investors to other emerging economies. Says Partha Sarkar, CEO, HTMT Global Solutions, ?Though India is manpower rich, it does not have all kinds of manpower. For example, 1/7th of US population is Spanish speaking. So, one might look at acquisitions in South America to acquire manpower which speaks Spanish.?
And it is the IT, Pharma and the automobile sectors that have proved to the most acquisitive in terms of volume. While in deal value terms, the ?traditional old economy? sectors such as energy, oil and gas, steel, cement, aluminium and other metals accounted for over 50 percent of the total outbound M&A this year. ?Indians acquire only to add value, while China acquires for strategic reasons. They are not necessarily for value always. This will prove to be to their advantage as far as their energy acquisitions are concerned,? says Frank Hancock, MD, ABN AMRO Asia Corporate Finance.
However, when it comes to acquiring a footprint into the developed economies of the world, India sure has an upper hand as shown by India?s recent takeover of China in terms of overseas deals made into developed economies. One of the most significant Chinese acquisitions in the United States recently, is of Lenovo Group?s $1.75 billion acquisition of IBM?s personal computing business. On the other hand, Tata Steel $12.2-billion acquisition of Corus in UK and Aditya Birla group aluminium major Hindalco?s purchase of the US-based aluminium sheet maker Novelis for $6 billion have been the biggest deals (in value terms) of the year so far and the combined deal size of these two has played a huge role in catapulting India onto the global M&A map.
Given China?s state run set-up many industry experts are of the opinion that the Chinese business community with an exception of perhaps Hong Kong is not as matured as India?s. ?Chinese companies maybe cutting edge but they don?t have that kind of transparency that Indian companies now have. This makes companies in the developed nations hesitant about forging deals with them, as they don?t know what life is going to be after the transaction,? opines Kapoor.
Also, the acquisition trail is making many countries vary of the ownership that is going into foreign hands. The sentiments become especially strong in case of state controlled economies like China. Canada is case in point.
China has been very active on the Canadian territory, which is now looking at putting in place some safeguards to protect national interests against acquisitions by ?state-owned foreign enterprises?.
When it comes to Indian companies acquisitions rush abroad, such baulking has not yet come to the notice. However, there are some statistics that show two out of three M&As fail which is roughly about 75-80% and India is not completely untouched by the M&A failure rate. Management integration and cultural issues stand out as biggest challenges in the face of global deals and prove to be crucial in deciding the fate of an acquisition. ?I am not sure if that statistic is true for Indian companies buying abroad as long term success is all that matters. And what is the definition of success of an M&A? Are you looking from the view of the performance of the stock or the long term benefits that the acquiring company will have over competition etc.,? says Anil Gupta, joint managing director, Havell?s India. Since the Indian acquisition party has just gathered steam, guess this debate is best left for time to settle.