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Acquisitions, US consumers and more...

Jun 3, 2008

India Inc. on an acquisition spree?
Action continues to dominate the metals space especially where M&A is concerned. After the high profile acquisition of Corus by Tata Steel, catapulting the latter to the fifth largest steel producer in the world and that of Novelis by Hindalco to strengthen the latter's presence in the aluminium sector, Sterlite has now joined the bandwagon. As per reports, Sterlite intends to buy the operating assets of bankrupt copper miner Asarco for a gargantuan US$ 2.6 bn. Asarco, owned by Grupo Mexico, the largest copper miner in Mexico, had revenues of US$ 1.9 bn in 2007. The deal, subject to the approval of a U.S. bankruptcy court, will be funded through debt and existing cash.

  • Pressing the 'A' button!

    Indian companies have increasingly been adopting the M&A route in the global markets. While acquiring scale has been an important driver, backward integration, acquiring brands and technology and having a widespread geographical reach have been other catalysts wielding an influence on the top brass of the acquirers. According to Thomson Reuters, Indian companies have announced overseas acquisitions to the tune of US$ 7.1 bn so far in 2008. That said, the price paid and the valuations have always been a matter of debate and increasing number of companies vying for the same acquisition target have pushed the valuations even higher. In the Indian metals space, especially, the large ticket size acquisitions have increased the debt levels of these companies and while the positives from the acquisitions will take a while to fructify and enhance financials. In the medium term, a strain on margins and cash flows cannot be discounted.

    What are the tax rebates being used for?
    The Bush administration's move to provide tax rebates to Americans to spur a sagging US economy is not turning out as per script. Bogged down by tumbling house prices and rising debt, American consumers are using the rebates not to spend more but to either pay bills or retire debt. Besides the crippling effect of the subprime crisis, rising crude and food prices are also taking its toll on the average American. As per reports, between late April and the end of last week, the Treasury handed out more than US$ 50 bn of the US$ 100 bn in tax rebates it had planned to distribute to 132 m households. But as per data provided by the International Council of Shopping Centers, chain stores registered an increase in sales only once in the last six weeks.

    At the end of the day, these tax rebates being handed on a platter are not a sustained solution for an economy, which has been riddled with tight credit cycles, rising unemployment and rising energy prices. The Government, by doling out these rebates, is giving the green signal to consumers to resume spending, when excess spending itself has landed the US in this quagmire in the first place.

    Brazil embroiled in environmental issues
    Is there any link between rising food prices and global warming? Yes, there is. And Brazil appears to be proof of the fact. Brazil is one of the nations home to the Amazon (around 60%), which represents over half of the planet's remaining rainforests and comprises the largest and most species-rich tract of tropical rainforest in the world. Environmentalists have been lamenting the progressive deforestation of this rainforest, which could accelerate global warming as more carbon is released. However, the International Herald Tribune reports that the Brazilian economy has been logging in strong growth rates due to companies claiming more of the Amazon's land for crops and livestock, and more of its trees for logging.

    Brazil has become a leading worldwide producer of grains including soybean, accounting for more than one-third of the country's gross national product. In addition, the country is currently the second-largest global producer of soybeans after the United States, mostly for livestock feed (Source: Wikipedia). Thus, as prices of soybeans rise, the soy farmers are pushing northwards into forested areas of the Amazon. In this recent scenario of soaring food prices, the Brazillian government has been caught between a rock and a hard place. Preserving the rainforest without hurting the growth of the agricultural industry will be a tough nut to crack going forward.

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