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M&A: Growth for the sake of growth?
Feb 7, 2006

The past 12-months have been witness to a sort of 'resurgence' in the inorganic growth activity within India Inc., which has seen significant action on the mergers and acquisitions (M&A) front. However, what was different this time with respect to M&As was the spiraling moves that Indian companies made in the global arena. If one were to take a look into the history of Indian M&A, there has been three distinct phases. The first was the pre-liberalization period, where acquiring an existing company was the best alternative to bypass the red-tapism and the bureaucracy of starting a new business venture.

The second phase of M&A in India was during the post-liberalization period, when, with the entry of multinationals, domestic players were forced to concentrate on improving their efficiencies in order to withstand and survive the new competition. This forced them (domestic players) to divest their non-core businesses and concentrate on the core business. A well-known example of this was the divestment by Tatas of 'TOMCO' (FMCG product) to Hindustan Lever.

The next phase of M&A was characterized by consolidation, which began some eight years ago. Currently, we are witnessing a new phase where not only global players are scouting for opportunities in India (as evident by the recent Holcim deals or Oracle acquiring majority stake in i-flex), but Indian players have also drawn up ambitious plans for expanding into the global arena. Be it a huge conglomerate like the Tatas or a relatively small industry house like Bharat Forge.

While growing inorganic growth activities indicate the confidence of Indian players to take global strides, one needs to tread with caution, as world over, the expected synergies have failed to materialise in a large number of such deals. This is because, apart from the synergistic monetary benefits, there are cultural and ideological issues that need to be integrated to reap the benefits of synergies. Secondly, with rising global valuations, it shall become increasingly difficult for an acquirer to find the right company at the right price as valuations of most of the companies are at their peak.

In such a scenario, the risk for stakeholders increases considerably. As someone once said, 'Growth for the sake of growth is the characteristic of a cancer cell'. Inorganic growth comes at a price, and investors should understand that a high price paid would only reduce returns in the future. To give an example, the recent M&A deal between Holcim and Gujarat Ambuja, valued at over US$ 200 per tonne is amongst the most expensive deal in the history of the global cement industry. Such deals do require some caution, as going forward Gujarat Ambuja has to outperform the domestic cement industry by a considerable margin to justify the premium.

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