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India Inc: On the prowl... - Views on News from Equitymaster
 
 
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  • Feb 27, 2004

    India Inc: On the prowl...

    Overseas acquisitions by Indian companies, seems to be the flavour of the season. Close on the heels of acquisition of companies in Germany and UK by Indian auto ancillary manufacturers like Bharat Forge and Sundram Fasteners respectively, has come the news that Tata Motors has acquired the ailing Daewoo Motors' commercial vehicle division for a total consideration of US$ 102 m. The phenomenon however, is not restricted to auto and allied sectors alone but has occurred in other sectors also, pharma and software being the case in point. While, Ranbaxy acquired French pharma major RPG Aventis, software giant Infosys took control of Australia based Expert Information Systems. If these events are anything to go by, there definitely seems to be a spring in the stride of Indian companies, who after years of sweat and toil have become capable of taking the best in the world and that too in their own backyard. What has led to this turn of events and what does it have in store for an average investor. Let us find out.

    Till the time the Indian economy was a closed one, domestic companies were by and large monopolistic in nature and thus insulated from the threat of competition. As a result, they barely made any effort to improve quality and productivity, as consumers, who had an extremely narrow spectrum to choose from always lapped up whatever they produced. But once the doors were opened to competition, both foreign as well as local, domestic companies started facing the heat. Pitted against players, especially the foreign ones, who were armed with low cost funds from the developed markets and better technology, companies with pre-liberalisation baggage found the survival difficult and soon realised that they will have to focus on improved efficiency and superior product quality to minimize any further damage. While some companies sunk without any trace, the ones that sailed through turbulent times emerged stronger than ever. Industry friendly policies from the government that gave a boost to consumption and at the same time eased financial burden (lower interest rates and hassle free borrowings) on the production front also helped.

    Now that these companies have successfully fended off competition and have taken big strides towards quality improvement and cost competitiveness, they have started to recognize big global opportunities that is staring them in the face. After all when you have cost structures that are one of the lowest in the world (companies like Gujarat Ambuja and Tata Steel are the lowest cost producers in their respective industries) and quality that is globally competitive (Infosys and Wipro are revered for their quality delivery standards and technical know how), what holds you back from the global markets. This reality has dawned upon the domestic companies and hence, they have been making efforts off late to leverage on the same.

    Globe trotting...
    Acquirer Acquired Company Location App. payout (Rs bn)
    Tata Motors Daewoo Commercial Vehicle S.Korea 4.6
    Ranbaxy RPG Aventis France 3.0
    Bharat Forge Carl Den Peddinghaus GmbH Germany 1.6
    Infosys Expert Information Systems Australia 1.0
    Sundram Fasteners Cramlington Precision Forge Ltd UK 0.1

    To a developing country like India, overseas acquisitions bring with them a whole lot of advantages. While employment opportunities and appreciation of capital wealth (of investors investing in these companies) would rank as the primary direct benefits, benefits in the form of increasing respect for the 'Made In India' brand and larger FDI inflows on account of wealth creation ability of globally diversified Indian companies would rank as the major indirect benefits. Besides, it also gives Indian companies an opportunity to hedge the geo political risk of being present in a single country and gives them the support of a huge middle class, whose appetite if satiated, can lead to a lot of surplus earnings, which can be invested overseas for acquisitions. It will also make available to Indian populace, the latest technology and product offerings, which were otherwise reserved for the developed markets. Moreover, we will find a very good avenue for parking the huge corpus of foreign exchange reserves that we have amassed.

    Other than the global designs of Indian companies, what really stands out is the quality and strategic fits that they have managed to carve out in their acquisitions. Bharat Forge's acquisition of Germany based Carl Den Peddinghaus and Ranbaxy's takeover of France based RPG Aventis are two such cases in point. In the case of the former, the German based company was facing pressure on the costs front but had access to high end technology and had top of the heap manufacturers like Audi and Volvo as its customers. Bharat Forge can thus shift the operations to India and bring the costs under control and at the same time can save the trouble of forming relationships from scratch with high profile clients that the German company has. In the case of Ranbaxy, the acquisition gives it an access to the huge generic market in France and possibly Europe and helps it to become a full-fledged generic player, especially in an era where drugs worth US$ 80 bn are expected to go off patent over the next few years.

    In the end, a word of caution. What investors need to realise is that going global has its own negatives. One, the failure of the acquisition to add any significant value to the acquirer. We must also understand that the domestic company also gets exposed to the country specific risks of the acquired company.

    Thus, the implication here is that global acquisitions can add value only when they are managed well. There have been cases in the Indian context (Silverline) where international acquisitions have gone bad. The focus must be on the competence of the Indian company to manage its own workforce and the workforce and culture of the acquired company. Possibly, it may take more than two to three years to turnaround (example, Tata Tea) and to that extent, optimism needs to be toned down.

     

     

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