by Aditya Bothra
This past year, the world has witnessed something quite out of the ordinary: a developing country making acquisitions and investments in foreign companies in amounts that exceed the foreign investments that it has attracted over the same period. That’s correct. Indian firms have been on a global acquisition and investments spree. Just this year, Indian firms have announced 34 foreign takeovers worth more than $10.7 billion in all. If the current trend continues, Indian firms are well on course to surpass the $23 billion in foreign acquisition deals that was recorded last year, a number more than five times the previous record.
Some of the big tag Indian deals that have been put through by busy M&A divisions of elite banks include Hindalco’s, an Indian aluminum major, purchase of Novelis, an American rival, for $6 billion, making it the world's biggest aluminum-rolling company with an established clientele that includes soft drink major Coca-Cola. But even this deal was overshadowed by Tata Steel’s acquisition of Corus, an Anglo-Dutch rival, for $13.2 billion, after an extended bidding process that saw it beat the offer of CSN, a Brazilian Steel major. The combined company is now ranked as the 5th largest steel producer in the world and is currently the largest foreign acquisition by an Indian firm. Other smaller Indian companies such as Reliance Gateway Net, VSNL, Scandent and GHCL have made inroads of their own during the same period through both investments and acquisitions to increase their global list of clientele and add to their burgeoning share of foreign business.
While it may come as a surprise to those unfamiliar with the Indian market, these large scale foreign acquisition deals reflect the current dynamics of the Indian economy. With GDP growth consistently averaging more than 8% and a strong efficiency based corporate model, Indian firms have generated large profits for themselves. With an average 10% profit margins yearly for Indian firms, estimated by the Economist, a value double the global average profit margin, it should be of no surprise that Indian businesses are buying globally by investing into such viable sectors such as pharmaceuticals, IT, auto, energy and chemicals.
The extra cash generated through record profits margins help, but the main modes that Indian companies have employed while financing foreign deals have been through rights issue, preference shares, overseas issue and long-term debt. For example, Tata Steel, in light of its recent acquisition, plans to raise $2.3 billion through both foreign and domestic equity markets and rake in more than $6.14 billion in debt financed by a consortium of banks. All this has been possible through long awaited reforms in Indian Merger & Acquisition and Financing rules that includes the removal of rules limiting the amount of debt that companies can accrue. A combination of these factors have allowed Indian firms such as Ranbaxy, a pharmaceuticals company, to fund eight acquisitions last year, in America, Romania, Italy, South Africa and elsewhere.
But one aspect of these acquisitions that boggle the mind of many is why exactly are Indian firms so eager to make these foreign acquisitions? India is after all a huge market in and of itself with a burgeoning middle class that is more than 300 million strong and countless domestic opportunities. Rather than buying out foreign firms, should Indian firms retain that money and invest it in the Indian market that is undergoing tremendous development? Not exactly. There are many practical reasons, other than the bragging rights that come with these high value acquisitions, why Indian firms are acquiring their foreign counterparts. Other than the basic intention to combine the cheap and skilled workforce to new markets, many Indian companies make use of acquisitions as means to acquire technology. Indian firms such as Hindalco and Suzlon Energy have acquired companies abroad keeping in mind that along with the companies’ workforces and clientele, they would also acquire new technology, the same technology that would have taken Indian firms years to develop independently. With growing costs and rising wages, the implementation of new technology to make production more efficient is necessary for long term sustainable growth.
While the recent avalanche of Indian acquisition deals have been seen as the direct result of a world that is being increasingly integrated through the forces of globalization, there have also been some protest on the part of foreigners on Indian government’s policy FDI cap on many key Indian sectors. Indian firms are free to buy in majority stake in companies abroad, but foreign companies looking to enter the Indian market are faced by caps on the percentage of a company they can acquire. This is not anything new, as India has been criticized over red tape and FDI caps in the past, but the government maintains that over the long run the caps will slowly be removed. Recently, however, the Indian government announced an increase in FDI cap in many key industries such as Telecom and Cement.
In the coming years it can be expected that Indian firms will continue to make acquisitions abroad as they seek to enter new markets, but at the same time these companies need to be careful not to rush into such deals as, unlike domestic acquisitions, cross border acquisitions require considerable time and money to integrate and therefore also carry a higher failure rate. But the world can rest assured that whenever and wherever there are opportunities available and money is to be made, the elephant will continue to march.