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Is your company in a shopping mood?

Jan 31, 2005

Dabur's Balsara acquisition on the FMCG side and Holcim's acquisition of a sizable stake in ACC are among the recent deals in corporate mergers and acquisitions. Instead of focusing on the stock markets and where the index is headed and so on, we here move aside and present the positives and negatives of the growing M&A activity in India Inc. There have been times in the mid 1990s and the late 1990s (during the tech boom) when India Inc. went on an expansion spree through the inorganic route. During the mid 1990s, the environment was different in the sense that corporates were not confident of their competitiveness in the global markets, interest rates were high, the Indian economy was in the initial phase of liberalisation, most sectors were still regulated and the management practices on the corporate side was evolving.

But the domestic economic downturn starting 1996 that lasted until the late 1990s resulted in India Inc. learning valuable lessons with respect to the need to cut excess workforce, improve operational efficiency through productivity enhancement and more importantly, focus on 'right-sizing' the balance sheet, which then was bloated with debts that were raised for both organic and inorganic growth purposes. Two other important aspects also changed the competitive landscape. The great leap on the technology side (Internet, being the biggest evolution as termed by many experts) and globalisation on a much larger scale did expose India Inc. to the threat of being overtaken in the domestic market by bigger multinationals. But to the credit of corporates in India, they have managed to pull it out in the last five years (2000-04), steadily.

Acquiring global companies in the UK and South Korea by the Tata's, Birla companies taking over mines in Australia and the Reliance Group acquiring sizable control of some global telecom networks, Asian Paints acquiring Berger International and gaining sizable South East Asian market presence are among the few hallmarks that have set the stage for the next decade of corporate expansion by India Inc. in the global market. At the same time, this also indicates the preparedness, amidst significant challenges, of India Inc. and the sea change in mind-set.

But these are not without challenges, which the investors should not overlook. There are challenges including employee integration, balance sheet restructuring, exposure to currency and country risks and so on, which can make or break the consolidated performance in the long-term. Tata Tea's acquisition of Tetley, though initially was welcomed big time by the stock market, later exposed the perils of the same. After almost five years, there is some clarity from the investor's standpoint as to how this merger will pan out from here on. So, before you become overly optimistic on a company pursuing its inorganic growth strategy, it is important to align your investment horizon to the objectives of the acquisition by the management. Otherwise, there is every chance to be disappointed.

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