Indian Companies Go on a Global Acquisition Spree

The number of Indian companies that are investing abroad has been steadily growing ever since the Tata Group successfully acquired UK's Tetley Tea for $430 million four years ago. According to KPMG, Indian companies shelled out $1.7 billion in the first eight months of 2005 for acquiring 62 overseas companies. While the IT sector, banking and financial services and pharmaceutical companies have been the most active in M&A deals, increasingly other sectors too are getting in on the act. If the small and mid-sized Indian companies too go in for acquisition deals - in the $1 million range - this could give a tremendous boost to India's manufacturing sector, writes D.V. Venkatagiri.

The Indian corporate sector is on the prowl. Few would have thought that Indian companies would dare to go beyond its shores and acquire companies. But the 'unthinkable' is happening. Buoyed by an upbeat economy, corporates around the country are planning to make that great move forward - acquiring companies globally to enhance their international  competitiveness. The table below provides some examples of the sectors in which Indian corporates have been the most active.

Indian Company	Acquired Company
Auto Component Companies
Bharat Forge	CDP, Federal, Imatra
UCAL Fuel	Amtec
Sundaram Fasteners	Cramlington
Amtek	GWK, Zelter, Anvil
Tata	Incat, Wundsch Weidinger, Daewoo
Pharma Companies
Matrix	Docpharma, Mchem, Explora
Jubilant	Target Research
Malladi	Novus Fine Chemicals
Consumer Goods Companies
Tata Tea	FMALI, Good Earth
Apeejay	Premier
IT Companies
Wipro	Nerve Wire
Mastek	Enteram

In the first eight months of 2005, Indian companies paid $1.7 billion - more than four times that the amount for all of 2001 - for 62 overseas companies, according to the accounting firm KPMG. Indian firms are truly becoming global and if the trend continues, we will have a host of home-grown multinational companies operating all around the world. What are the reasons for this sudden surge in India Inc's global acquisitions? For one, the easy  availability of dollars in India, as a result of the government's policy of economic liberalisation which began in 1991, has made is much easier for companies to go global. In 1991,  India had less than $1 billion  in reserves and today, the country is flush with foreign reserves, totaling $140 billion. Second, many of the regulations and controls which made it difficult for Indian companies to operate internationally, beyond exports, have been lifted.

A third reason is also the big change in mindset that come about as a result of greater exposure and increased competitiveness. As corporates have successfully faced the challenges of competing on foreign turf, they have matured and grown in self-confidence. Meanwhile,  more and more US and other global  private equity firms are giving Indian companies funding for acquisitions in the West. It was the Tata Group's Tata Tea that began the trend when it acquired the UK's famous brand, Tetley Tea, for $430 million four years ago. The deal made Tata Tea the world's second largest tea company and remains the biggest Indian acquisition abroad. Taking the cue from the Tata's, other Indian companies began expanding their business overseas.

The Emerging Global Players

When in January 2005 the Indian government removed the $100  million cap on foreign investment by Indian companies and raised it to the net worth of the companies, the trickle of foreign investment abroad turned into a flood. According to a report by Assocham,  the Indian IT sector remains leads other sectors in  acquisitions deals. It accounts for nearly 17 per cent of all acquisitions abroad in April-July 2005. Banking and insurance companies too are frontrunners, accounting for 13 per cent of all mergers and acquisitions. The pharmaceuticals industry with 13 per cent, fast moving consumer goods (FMCG) with 8 per cent, media and telecom with four per cent each, engineering, metal, automobile and textiles with 3 per cent each, paper (2 per cent), infrastructure, hotel, packaging and chemicals (1 per cent each) are the other sectors that have active in acquisition deals abroad.  Clearly, IT, banking and insurance, pharma and FMCG are way ahead of the others, accounting for 50 per cent of the deals. Indian IT companies stole the show with seven of them acquiring foreign companies, and the most significant ones include the acquisition of i-Flex by Castek Software, Stay Top Inc by Goldstone Technology Ltd and vMoksha companies by Helios.

The banking and financial services sector too has been a prominent player in global acquisitions. ICICI Bank's acquisition of the Russian Investitsionno Kreditny Bank, SBI's takeover of Mauritius Bank and the merger of Bank of Punjab with Centurion Bank are some of the prominent examples in this sector. In insurance, as well, one of the biggest deals occured when Standard Life of UK sold its 4.9 per cent stake in HDFC to CLSA Merchant Bankers for Rs 1018 crores.

The pharma sector's biggest acquisition deal was Matrix Laboratories' acquisition of 22 per cent stake in the Belgium-based company Docpharma for US $263 million. Some of the other prominent acquisition deals include UCAL Fuels' purchase of the US-based Amtec Precision Products Inc engaged in manufacturing of auto ancillary products for $28 million; Aditya Vikram Birla Group's buyout of a Canada-based pulp plant .

Bharat Forge is yet another inspiring example. An Indian maker of steel car components, the company recently bought forges in the United States and Germany. According to a report the company’s chief Baba Kalyani terms the strategy a "multishore model" - carrying out both production and marketing in each of the major markets of Europe, Asia and North America. "Being a global auto-component player does not only mean growing exports," Kalyani is reported to have said. "It also requires a strategic vision that skillfully combines the comparative advantages of each location so that the whole is significantly greater than the sum of its parts."
Among the Indian corporates that have emerged as big international players is the Videocon group. The group  in one fell swoop became the third largest colour picture tube manufacturer in the world when it announced the purchase of the colour picture tube business of France-based Thomson SA, which includes units in Mexico, Poland and China, for about Rs 1,260 crore. Videsh Sanchar Nigam Ltd., or VSNL, the former state monopoly for international telephone calls that was privatised in 2002, also has global ambitions. The company recently paid $130 million for 60,000 kilometres of undersea cables owned by the US giant Tyco International. Now, with trans-Atlantic, trans-Pacific and inter-American cables, the company's ambitions stretch beyond India.

The Way Forward

While Indian companies' acquisition of foreign firms is on the rise, it still has a long way to go before it can reach the level that Chinese companies already have: the Chinese acquisitions involve buyouts running into billions of dollars. But bankers argue that in contrast with China's state-backed globalising companies, heavily reliant on cheap domestic production, the Indian acquisition model is the result of the country's entrepreneurs evolving into global players on their own steam.India’s  private banking system and open capital markets force better are the foundations on which Indian acquisitions are based and therefore have much more financial discipline. Indian companies' strengths lie in its widely acknowledged world-class managerial talent. The growing trend of thousands of professionals returning home after long stints overseas is expected to add more power to Indian corporates that are expanding globally.

An interesting aspect of Indian acquisitions is the fact that the average deal is worth about  US $30 million. If this trend paves the way for smaller deals  - in the $1 million or less bracket - with the mid-sized and small business sector getting into the act, it could give a huge boost to the SME sector. Most of the Indian companies that are acquiring foreign companies may eventually not become transnational companies in the true sense. However, just as the world is beginning to recognise the worth of skilled Indians, and is valued for their process and service skills, so too, the increasing number of Indian owners of business entities in foreign lands will bring more recognition for Indian entrepreneurship. This could well be the first step towards India's emergence not just as a manufacturing powerhouse which will further embellish its already proven record as the leader in services.

The author is the Regional Secretary of Indo-American Chamber of Commerce, South India Council, Chennai. The views expressed by the author are personal and are not that of the Chamber.