When the Tatas emerged as the frontrunner to take over UK-based tea major Tetley in 2000, the global business community was skeptical. Tetley, now a part of Tata Tea, is today picking up global assets for the parent company.
The Aditya Birla group, led by Kumar Mangalam Birla, now owns copper mines in Australia and a BPO company in Canada.
Emerging MNC Bharat Forge has three plants in three continents.
If all goes well, Tata Steel will snap up UK-based steel major Corus for $9 billion. Six years after the Tetley takeover, skepticism is giving way to confidence.
Global business finally accepts Indian companies can acquire and successfully manage global assets. This is based on one premise. “India is slowly emerging as an economic superpower. This builds a lot of confidence. Indian companies have created an enviable track record by improving the prospects of global companies,” says TV Raghunath, executive director, investment banking, Kotak Mahindra Capital Co Ltd.
More acquisitions will happen
Indian Inc’s appetite for global assets is growing daily. Some factors encourage this trend. The availability of assets, especially in Europe and the US, are rapidly increasing.
Galloping costs and declining bottomlines have made promoter families look at divesting their holdings; the Birlas, for instance, recently bought BPO firm Minacs. Private equity funds, which had invested in US and European companies, are increasingly encashing their investments. And in most cases, these funds are finding a preferred suitor in India.
Easy access to funds from overseas banks is reducing the time lag for acquisitions. For instance, Standard Chartered Bank is in the process of arranging part of the $9 billion to be raised by Tata Steel for the Corus acquisition. Globalisation is forcing Western financial systems to fund Indian acquisitions of Western MNCs.
And India Inc is confident of expanding its global footprint. Says Birla: “Nearly 25 per cent of our turnover today comes from overseas businesses and I believe the number will be in the ballpark of 40 per cent by the turn of the decade. And that too, on a larger base because growing across the globe is the corollary of the growth plans of several of our businesses.”
Small steps to giant leaps
Three years back, Indian companies were going for smaller acquisitions with costs ranging between $50 million and $100 million. Things have changed now with mega acquisitions becoming a reality. “Our self-confidence is improving with each global acquisition. India is taking thoughtful and measured steps. We have to build on this,” says R Gopalakrishnan, executive director, Tata Sons.
Ranbaxy is a classic example of how small steps can lead to giant leaps. After taking over small global companies in the beginning, Ranbaxy recently acquired big pharma companies including Romania’s Terapia for Rs 1,500 crore.
Nimesh Kampani, chairman, Morgan Stanley feels global acquisitions will lead to technological growth and penetration into new markets. To be precise, India with a low-cost manufacturing base will get access to global markets. He feels a company has to go through a learning curve before it becomes a multinational.
Even cultural integration is critical to achieving long-term success and in this, Indian firms have been successful. “It is better to retain the existing management. Indian companies are doing that and getting results,” says Raghunath.
While easing of regulations have played a role in accelerating global acquisitions, mega mergers like the one consummated between Arcelor & Mittal Steel will happen only with clearer laws.
Presently, a company gets automatic approval for investing up to 200 per cent of its net worth on global acquisitions. But the law does not permit mega mergers that don’t involve big cash transactions. This will become a reality only if the capital account convertibility regime comes into force. Dilip Choksey, joint MD of consulting firm Deloitte Haskins & Sells, feels the Companies Act is not friendly to all types of cross-border amalgamations. “But it is possible to structure a deal in making a mega merger happen. We need to substantially step up the execution of the law. If this happens, India can become an economic superpower.”