indian mncs far - IBEF · THE INDIAN MNCs indian mncs far.qxp 16/106 4:21 PM Page 50. 51 W hen India initiated a pro- ... in March 2005, a leading hormonal brand, Uno-Ciclo from ...

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Industry

POWERING BHARAT FORGE TO BECOMING A GLOBAL MAJOR: Baba Kalyani at Bharat Forge’s Pune plant

After having withstood the heat of competition from foreign majors for over adecade, Indian companies are now venturingabroad and buying out their competitors.Darrel Philip reports on the global acquisitions of India Inc

THE ADVENT OFTHE INDIAN MNCs

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When India initiated a pro-gramme of economic liberal-isation in 1992, in whichthe licensing system for set-

ting up industries got dismantled and FDIwas gradually welcomed, many fears wereexpressed that India Inc. would beswamped by MNCs. Thirteen years later,the clock has come full circle. Not onlyhave Indian companies fought off the MNCchallenge, but they have taken the com-mercial battle overseas by acquiring scoresof companies abroad.

It has been an unlikely makeover butthe Cinderella-like transformation hasbegun to acquire a quiet sheen. More than75 Indian businesses are expanding global-ly, bringing them closer to the definition ofa true MNC. And, what has been moststunning is the revelation that last year,quick estimates show that India Inc hasinvested almost twice the amount abroad,$10 billion, than the FDI it received.

As companies grow, have surplusfunds, and want to expand their markets,they have discovered the virtues of acquir-ing property abroad — from oil and gasfields in Africa, to copper mines inAustralia, to automobile companies inKorea to pharmaceutical companies inEurope.

Data compiled by India AdvisoryPartners, the Mumbai and London-based

corporate finance advisors who trackmergers and acquisitions, reveals that thenumber of overseas acquisitions by Indiancompanies has been climbing steadilysince 2002. That year, 28 foreign compa-nies got acquired by Indian corporates andthe figure climbed to 49 the followingyear, 60 in 2004 and 100 in 2005. Inmoney terms, the acquisitions were val-ued at $209 million in 2002, $1.8 billionin 2003, $1.79 billion in 2004 and $2.3billion last year. The firm’s compilation ison the conservative side, as it onlyaccounts for equity investments. Debtacquisitions of companies taken over, andinvestments in other forms, are not includ-ed.

The boom of 2003 was due to somebig-ticket investments in the oil industry;an industry that drew big money even in2004. But the picture has changed in2005 with consumer goods taking thehonours. The topper last year was TVmajor Videocon’s $280 million acquisitionof Thomson, the $7 billion French mediaand entertainment industry serviceprovider’s TV tube businesses in China,Mexico, Poland and parts of Europe. Thedeal was inked in a series of meetingsbeginning January 2005 and culminatingin June. In another acquisition which gavean Indian company a major brand, theKolkata-headquartered Apeejay Surrendra

PROXIMITY TO REGULATED MARKETS: Wockhardt’s Habib Khorakiwala


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group bought out Britain’s Premier Foods’tea business for $140 million. Coming fiveyears after Tata Tea bought out Tetley’s,it signalled that the ‘natives’ had trulytaken charge of Britain’s cup that cheers.

In terms of sheer size, the big ticketinvestment outflows in recent years arestill in the government controlled petrole-um sector as India tries to secure oil sup-plies. The largest deal in 2004 was thepublic sector energy giant Oil and NaturalGas Corporation’s acquisition of a 50 percent stake in an offshore block in Angola

for $603 million. ONGC is also building a$1.2 billion refinery at Port au Sudan anda 741 km pipeline from Khartoum costing$200 million. The state-owned Indian OilCorporation has won a bid for a large oilblock in the Sirte Basin of Libya. India hasso far invested over $3 billion in global oilexploration efforts and is keen to pump inat least a billion dollars every year.

If oil and gas fields are the the bigthrust areas of state-run petroleum compa-nies, Indian companies seem to have clear-ly identified their favourite hunting

grounds. A look at major acquisitions byIndian companies over the past two yearsshows the automobile and pharmaceuticalsectors choosing companies in Europe fortakeovers, while the metals and mineralssegment has targeted firms in the Asia-Pacific region. However, the US seems tofind favour with information technology,telecom and IT-enabled services firms.

In the automotive sector, of the fivemajor overseas acquisitions over the pasttwo years, three deals took place inEurope. Amtek Auto took over GWK of theUK, Sundaram Fasteners took over DanaSpicer of UK and Bharat Forge took overCarl Dan Peddinghaus GmBH of Germany.There has been one major deal in Asia —Tata Motors’ acquisition of the commer-cial vehicles business of Daewoo Motorsin South Korea.

Analysts believe Europe is turning intoa favoured M&A region as it is gettingincreasingly difficult for manufacturingcompanies to base their operations inEurope and still produce in a cost- compet-itive manner. Stringent labour and environ-mental regulations in Europe mean that thecosts of compliance add significantly tooverall manufacturing costs. Faced withofferings from lower-cost Asia based man-

PIONEERING THE BRAZILIAN ROUTE: Glenmark’s Glenn Saldanha

INDUSTRY

The top five global equity acquisitions by India Inc in 2005Value Acquirer Target Country$ mn

280 Videocon group Thomson’s colour China, Poland, picture tube business Mexico and Italy

255 Matrix Laboratories Docpharma NV Belgium

172 Videsh Sanchar Nigam Ltd Teleglobe International Holdings Ltd USA

140 Apeejay Surrendra group Premier Foods plc’s tea business UK

130 Tata Steel Millenium Steel Company Thailand

On the WebTata Motors: www.tatamotors.comBharat Forge: www.bharatforge.comVideocon: www.videoconinternational.comGlenmark Pharmaceuticals:www.glenmarkpharma.comRanbaxy: www.ranbaxy.comWockhardt: www.wockhardt.com

Pharma industryexecutives say

that they prefer togrow organically inthe US but choose

the acquisitionroute in the

European market.

Source: India Advisory Partners


INDUSTRY

ufacturers, it’s a double whammy whichfew mid-sized European companies canstand up to.

Such a situation provides ample oppor-tunities to Indian companies to scout

around for the right M&A targets. Onecould ask how a change of ownership,from a more knowledgeable one to a rela-tive greenhorn as far as the local market isconcerned, could work miracles. Theanswer lies in the synergy of a local distri-bution network and low-cost manufactur-ing based in Asia, which makes the com-panies competitive. Says Narender Nagpal,head, research, Deutsche Bank, “Settingup a subsidiary and attempting to groworganically could take years. Even then,and then too, only the consumer segmentcould be tackled effectively by incurringother major costs, like brand-building etc.”

In the outsourcing/OEM segment, as inthe case of auto manufacturers, a merger

provides Indian companies immediateaccess to principals who would normallyhesitate to change vendors with whomthey have developed relationships andtrust over decades. A merger providesIndian companies immediate access tothese principals. Further, this also worksout to be mutually beneficial for both par-ties as European vendors have to oftenhave clauses to meet annual cost reduc-tion targets in long-term contracts signedwith their principals. The low-cost manu-facturing base in India helps meet thesetargets while allowing for reasonable prof-its for the vendors.

“As more Indian auto component com-panies achieve higher scales of production,there would be an increased trend of ink-ing acquisitions in the European region asit gives access to a ready and global clientbase,” points out Baba Kalyani, CMD,Bharat Forge Ltd, one of the largest autocomponent exporters in India and the sec-

Companies havediscovered the

virtues of acquiringproperty abroad —from oil fields inAfrica, to copper

mines in Australia,to truck companiesin Korea to phar-

maceutical compa-nies in Europe.


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INDUSTRY

ond largest forging company in the world.Kalyani believes the acquisition of CDPGmbH would also strengthen BharatForge’s position in the global passengercar and chassis component business andhelp it attain global leadership as, withCDP’s technology in aluminium, the groupwould now offer forged components inboth steel and aluminum. Kalyani sees thetrend set by his $1.25 billion group catch-ing on and cites the examples of twomajor Indian auto component firms, RicoAuto and Omax Autos, which are current-ly scouting for acquisitions in the sameregion.

Similarly, in the pharmaceuticals sec-tor, seven out of the 10 major acquisitionsduring the last two years happened inEurope. Big-ticket purchases in Europeincluded Ranbaxy’s buyout of RPGAventis, Wockhardt acquiring CP Pharmaof UK and Esparma of Germany, JubilantOrganosys’ buyout of PSI Supply ofBelgium, Zydus Cadila taking overAlpharma of France and Dabur Pharmaacquiring Redrock of the UK.

“Acquisitions of small and mid-sizedforeign companies provides Indian pharma

majors proximity to regulated marketssuch as the US and Europe and providesthem an opportunity to get higher mar-gins,” says Wockhardt’s chairman HabibKhorakiwala. For instance, Germany is thelargest branded generics market in Europe,which accounts for 40 per cent ofWockhardt’s sales.

Pharma industry executives say thatthey prefer to grow organically in the

US, but choose the acquisition route inthe European market. “In the US it’s easi-er to set up a greenfield facility, while inEurope its tougher to start operations fromscratch so acquisitions are easier,” saysGlenn Saldanha, MD and CEO ofGlenmark Pharmaceuticals. However, notall pharmaceutical companies believe ingetting a grip on high-cost US andEuropean markets through the cost route.Some are establishing footprints in otherdeveloping countries.

Among them is Saldanha’s companywhich had plans on the $7 billion Brazilianmarket, the largest in South American,since 2003. That year, Glenmark set upGlenmark Farmaceutica Ltda, a wholly

owned Brazilian subsidiary. The followingyear, the Brazilian subsidiary bought outLaboratorios Klinger, a privately-ownedBrazilian company for $5.2 million.Glenmark followed this up with its sub-sidiary purchasing, in March 2005, aleading hormonal brand, Uno-Ciclo fromInstituto Biochimico IndústriaFarmacêutica Ltda for $4.6 million.

In the IT industry, which has oftenbeen credited with helping Brand Indiagain international credibility, the essenceof M&A activity has been on acquiringsize, not geographic markets. Whether itwas the merger of Polaris with Citigroup’sOrbiTech or Wipro’s acquisition ofSpectramind and GE Medical SystemsInformation Technology (India) or MphasisBFL’s acquisition of a Chinese firm, therationale has been to add numbers. The‘growth in size’ logic of the Polaris-OrbiTech merger in end-2002 saw a spurtin the merged entity’s revenues from $60million to $125 million. The merger alsoadded 1,400 employees to Polaris, takingthe total employee strength to 4,000.

Similarly, for Bangalore-based vMokshaTechnologies, the logic behind the acquisi-

TATA MOTORS’ ACQUISITION OF DAEWOO’S TRUCK BUSINESS ENABLES IT TO GO GLOBAL: Ratan Tata (centre) at the Daewoo plant


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INDUSTRY

tion of two US-based companies,Challenger Systems and X media, was toincrease its size by widening its customerbase. Pawan Kumar, chairman and CEO ofvMoksha Technologies says, “The size ofa company does matter when interactingwith customers and clients. These acquisi-tions added 120 people to our staff.”Sometimes the impetus for acquisitions isnot just size which helps get customers,but also skills-acquisition. Such aninstance occurred when Wipro acquiredthe global energy practice of AmericanManagement System and the R&D divi-sions of Ericsson. At one stroke, Wiproacquired skilled professionals and a strongcustomer base in the areas of energy con-sultancy and telecom R&D.

A McKinsey report on mergers andacquisitions states, ‘A rise in the numberof mergers and acquisitions by Indian ITcompanies is likely in the near future dueto competition ushered in by the influx ofMNC IT companies. In order to competewith global IT majors setting up base inIndia and to expand their global reach,more and more Tier-1 Indian IT companieswould acquire global Tier-2 IT companies.Similarly global Tier-1 IT companies inorder to penetrate deeper into the Indianmarket would look at Tier-2 Indian IT com-panies in the near future.’

While the importance, size, pricingpressures and global companies consoli-dating and building offshore capabilitieshave made M&As relevant for Indian ITenterprises, a lesser known rationale is off-shoring. As the US economy is shruggingoff its recessionary hangover, a judicious

mix of the offshoring model has suddenlybecome an important component in thebusiness plan for a software vendorabroad. “It’s a typical issue that small andmedium-size software companies based inthe US and Europe face these days sinceoffshoring has emerged as the in-thing forcutting costs. This means that next timeyou start negotiating a software project, itis inevitable to present your offshoringplan which may result in over 50 per centsavings in costs for clients,’’ says T RSrinivas of Taib Bank. “So there are sever-al of these companies out there, willing toeither get acquired by an Indian softwarecompany or merge their business to

improve the scale of operations,” he adds. While Indian companies may be on a

buying spree overseas, the inescapablefact is that they are relative newcomers tothe game of cross-border acquisitions. Anoptimistic mindset might not be enoughwhen it comes to tackling new markets,foreign regulations and sometimes domes-tic red-tape. The relatively easy entry intoEurope doesn’t mean it will be smooth sail-ing for the Indian acquirers. There areissues they have to deal with, such as reg-ulations, market liabilities and culturalissues. Also, strict norms on everythingfrom environment to customer protectionmake the Indian acquirer vulnerable to a

DOMINATING THE PICTURE TUBE INDUSTRY GLOBALLY: Videocon’s Venugopal Dhoot

The topper lastyear was

Videocon’s $280million acquisitionof Thomson’s TVtube businesses inChina, Mexico and

Poland.


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INDUSTRY

host of lawsuits and penalties. Add to that India’s own commercial

policies, which have not kept up with busi-ness@speedoflight. The existing frame-work for mergers in India involves obtainingapprovals of the high courts and do notrecognise the process of mergers throughcontracts with shareholder approvals; as isprevalent in the US. However, slowly butsteadily, the government is graduallychanging some of its policies to facilitateM&As. In January 2004, the Indian govern-ment removed the ceiling of $100 millionon foreign investment by Indian companiesand raised it to equal their net worth.

The relaxation has had another fallout.

With the government relaxing the limit onthe money that can be sent abroad, a dis-tinct cash deal trend has emerged. In thefirst wave of overseas takeovers a coupleof years ago, stock deals were the rage.But with stock prices falling by 10 -15 percent, stock deals are passé. Indian compa-nies are sallying forth in search of capaci-ties, new markets, raw materials — Indo-Gulf wants to buy mines in Australia andSouth Africa — and new technologicalskills.

The acquisition drive in 2005 was notrestricted to traditional markets like the USand UK alone — companies went to coun-tries as diverse as Australia, Romania,

Germany, Bulgaria, South Africa andTunisia. Unlike previous decades whenIndian companies opened a foreign officeand considered themselves global, the cur-rent crop of Indian businesses is looking atbuilding integrated business models thatwill help produce at lowest costs while sell-ing in the most profitable markets.

“The mindset is to build an Indian MNCthrough sustainable competitive advan-tage. However, this thought process is notdriven by lofty ambitions alone. The harshreality of global competition entering theIndian market through the gradual phasingout of tariff/non-tariff barriers as requiredunder WTO means that acquiring criticalmass and diversification of markets is criti-cal for survival,” says Anand Mahindra, MDof automotive major Mahindra &Mahindra.

All deals may not come through. In earlyMay 2005, Purnendu Chatterjee, theextremely low profile investor-turned-entre-preneur and one-time associate of the leg-endary George Soros announced a cross-border leveraged buyout of Basell, theworld’s largest polypropylene maker. Thedeal, structured with Russian oil, coal andtelecom billionaire Len Blavatnik, the firstLBO and the largest involving an Indian,was valued at $5.7 billion. The deal did noteventually materialise, as Chatterjee couldnot leverage his Indian holdings. Yet itproved one thing: that Indian enterpreneurscan think big.

The Basell buyout would have beenunthinkable some time ago. But as reformsgain momentum and Indian industry discov-ers a new confidence, it shows that IndiaInc. not lacking in imagination in graspingopportunity in foreign shores.

THE BUYOUT BRIGADE of India Inc. in2005 was led by the $15 billion Tatagroup which made eight major acquisi-tions abroad totalling $1 billion. In June,the group’s international telecom gate-way Videsh Sanchar Nigam Ltd acquiredTeleglobe International Holdings Ltd, theBermuda-based provider of wholesalevoice, data, IP and mobile signaling serv-ices, for $239 million. The acquisitiongave VSNL access to a global communi-cations network which reaches morethan 240 countries and territories.

Other acquisitions were the ones ofMillenium Steel in Thailand by Tata Steel,FMALI Herb Inc and Good Earth Corp. inthe US by Tata Tea through its US sub-sidiary Tetley US, and the Starwoodgroup of hotels by Indian Hotels. Besidesthese, Tata Motors acquired a 21 percent stake in the Spanish bus manufac-turing company Hispano Carrocera; TataChemicals became an equal partner in

Morocco’s Indo MarocPhosphore to producephosphoric acid.

Most of thesetakeovers were exten-sions of acquisitionstrategies already craft-ed. The Teleglobe pur-chase followed up theNovember 2004takeover by VSNL ofanother global network,Tyco Global Network for$130 million. TheMillennium Steel buyout

consolidates Tata Steel’s August 2004acquisition of Singapore-based NatSteelfor $291 million. And the bus makinginvestment comes on the heels of TataMotors’ acquisition of Daewoo’s com-mercial vehicle division by Tata Motorsfor $103 million in March 2004.

Five years ago, Tata Tea, the world’slargest integrated tea company, hadbought out Tetley Tea in UK for $407million. It was the first acquisition by anIndian company in the consumer prod-ucts business and analysts were scepti-cal whether the Tata group would be ableto manage, and retire, the debt incurredfor the buyout.

The Tata charge abroad is part of care-ful plan drawn out by group chairmanRatan Tata, who wants 30 per cent ofhis group’s revenues to be generatedoverseas. With this target in mind, thegroup has made strategic investments toacquire key assets abroad.

THE BILLION DOLLAR TATA CHARGE ABROADA merger providesIndian companiesaccess to princi-pals and it alsohelps Europeanvendors to meet

annual cost reduc-tion targets.


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