Sunday, December 10, 2006

Emergence of Indian MNCs

Year 2006 will probably known as the year when Indian businesses & Indian businessmen emerged on the global map. India’s emergence in the global business arena has been driven mainly by acquisitions and mergers. In January 2006, Lakshmi Mittal CEO of Mittal Steel launched a hostile takeover bid for Arcelor - which was completed by July 2006. On similar lines, Tata Steel went abroad with acquisition of NatSteel in Singapore and Corus Steel in the UK.

Notable cross-border acquisitions

Some of the Notable cross-border acquisitions in the year 2006 are:

  1. Videocon Industries buying Daewoo Electronics - $731 Million
  2. Dr Reddy Labs acquires Betapharm Arzneimittel - $572 Million
  3. Ballarpur Industries buys Sabah Forest Industries - $261 Million
  4. Ranbaxy Labs acquisition of Terapia - $324 Million
  5. Suzlon Energy buys Hansen Transmission - $565 Million

In total, Indian firms spent $15.72 billion in 192 overseas acquisitions. While this number may not be significant when compared on a global scale, this number is significant in the global context. The real significance of this should be seen from the fact that next year this number could double or even triple, making India as Asia’s largest acquirer abroad.

India Plays with Global Expansion

Indian companies are using all the tricks of the trade to go global: Mergers & Acquisitions, Organic expansions, Green field investments, and Joint Ventures. The scale and the business share may not be significant today, but Indian businesses are slowly but surely establishing themselves abroad.

Tata Motor’s successful acquisition of Daewoo’s truck unit in 2002 in S. Korea has become a classic business case study. Tata acquired a loss making unit - and without any layoffs, turned the loss making unit around. This built enormous goodwill and reputation for Indian companies in S. Korea. This helped Videocon acquire Daewoo Electronics and is aiming to acquire LG-Philips LCD Co. In S. Korea. Success of one acquisition in a particular country/market has prompted other Indian companies to look for acquisition in the same country. Given this mentality, one should not be surprised if Indian companies make a major acquisitions in S. Korea in 2007.

Similarly, Tata’s successful acquisition of Tetly Tea in UK prompted several Indian companies to look for acquisitions in the UK and European markets. Tata-Corus deal (if it succeeds) will mark a new beginning for mega deals involving Indian companies.

Why opt for Acquisitions

Indian companies have long practiced conservative business practices, have maintained almost zero debt and are in very good financial health. This when coupled with access to significant pools of capital - either foreign debt or stock markets - creates an ideal situation for acquisition abroad. Another potent power which Indian companies can leverage is its vast pool of highly talented human resources. All this when combined together creates an ideal conditions for Indian companies to expand abroad.

The reasons for cross border acquisitions by Indian companies stems from their traditional thinking: Reduce risk and build global competencies. Cross-border acquisitions make natural sense for Indian firms. The five main reasons (pretty much in the same order) why Indian companies opt for acquisitions are:

  • The lure of access to global markets.
  • Leveraging the synergy with the existing businesses
  • Strengthening the acquired company - via better management
  • Reduce competitive threats and vulnerability to other global giants
  • Create a Global Company.

To understand, consider the example of Dr Reddy Labs acquisition of Betapharm Arzneimittel. This acquisition gives Reddy Labs access to German and high grown Central & Eastern European markets. Betapharm Arzneimittel’s business has a good synergy with Dr. Reddy’s existing business, and give the company a significant presence in Germany.

In 2006, the largest number of acquisitions were in the pharmaceuticals sector, followed by IT and manufacturing sector. Indian companies are buoyed by strong local demand, red hot stock market, strong management capability and a desire to move up the value chain. Indian managers have the vision to go global - this vision is further encouraged by brain gain, when experienced expiates are returning back to India and using their rich experience and capability to help local firms expand abroad.

Risks in Cross-Border Acquisitions

Cross-border acquisitions are always fraught with risks. Indian companies also have to face a lot of risks when compared to European, Japanese and American companies. The risk is greater for Indian companies - mainly because Indian firms lack experience in international acquisitions & mergers, coupled to it, Indian companies are not exposed to different cultures. The five biggest risks Indian companies face cross-border acquisitions are:

Risk of overpaying for the acquisition or Risk of over-leveraged acquisition
In a competitive bidding scenario, there is a high possibility of over bidding for the acquisition, and that may result in Indian firms over-leveraging for the foreign acquisition. This risk is particularly very high in a cyclical markets when the market is on the upswing.

For example, Tata Steel would be over paying for Corus Steel if Tata outbids CSN. CSN had bid 475 pence a share Vs Tata Steel’s original bid of 455 pence a share. Coupled to that Tata Steel’s acquisition strategy is driven by taking on large debt to pay for Corus acquisition - and things can get really nasty if there is downturn in the global steel industry.

Risk of downturn in the global market

Companies which deal in commodity products: steel, metals, chemicals, etc. face the risk of global downturn in markets. For example, Tata Chemicals acquired UK based Brunner Mond - this acquisition made Tata Chemicals the 3rd largest manufacturer of Soda Ash. If there is a downturn in this market, then Tata Chemicals will be in trouble. (Also see: China’s Globalization Plans off to a rocky start)

Cultural Integration Risks

Cross-Border acquisitions always carry the risk of cultural integration. Though this risk exists in all acquisitions, the risk is particularly greater in a cross-border, cross-cultural acquisitions. For example when Tata Motors was bidding for Daewoo truck division, The biggest challenge for Tata Motors was to convince the bankruptcy courts that Tata Motors are a serious about their bid and had a viable revival plan. Toughest challenge for Tatas was to integrate Korean workforce with the new Indian-Korean management. Similarly, when Indian companies acquired American firms in early 2000, there were cultural integration issues - where American employees were reluctant to work under the Indian management.

Government Regulations can affect Global Markets

Sectors like health care, Pharmaceuticals, and Energy are highly regulated by governments. Changes in government regulations can have severe impact on the profitability.

Political Instability in emerging MarketsRisks of political instability are very high in emerging markets. For example coup in Thailand, Fiji, instability in Nigeria, Central Africa, Zimbabwe etc. Can have adverse effect on profits. Many Indian companies are expanding in Africa, and Asian markets - which are susceptible to political risks.

Minimize risks with Partial Acquisitions

Since acquisitions carry a great risk - companies can try to take another route to avoid the risks of an outright acquisition - use partial acquisition. Partial acquisition is when a company acquires a substantial stake in another company - and with a right to buy the remainder as per a predetermined plan or without an option to buy the remainder.

Companies like to use this option of partial acquisitions so that they can learn the local operations from the partner - without exposing themselves to these operational risks. This is a preferred way to enter new market segments and new geographies - where the company has very little experience. For example, Tata Tea has acquired 30% stake in Energy Brands Inc., the maker of flavored tea drinks. Since Tata Tea does not have expertise in selling soft drinks - this will be an ideal way to venture into new areas. Similarly, ONGC has invested 15% in a Brazilian oil exploration venture.

Joint Ventures is also an attractive option

Ranbaxy completed five acquisitions in the year 2006. This is surely a mark of success and confidence, for Ranbaxy - this was just another year in their long march towards becoming a global pharma giant. Ranbaxy started venturing abroad via joint ventures. In 1977, Ranbaxy expanded into Nigeria via a joint venture. Today Ranbaxy has several JV all across the world.
Joint ventures offers a low risk option for going abroad. Often times, a joint venture is used as an entry vehicle into foreign markets. Aditya Birla group used joint venture as a preferred means to enter into Thailand, Egypt, China, Canada, and Indonesia.

Another company which used JV to successfully expand abroad is Essel Propack. Essel Propack is the world’s largest manufacturer of lamitubes - used to package toothpaste, gels, and creams. Essel operates in 14 countries and has 24 manufacturing facilities. Many of these outposts were created via JV, acquisitions and green field ventures. Essel’s march into the global scene has been partially driven by the fact that its main product - "empty tubes" are not cheap to transport, thus forcing the company to setup manufacturing facilities close to its customer locations. Essel has a global vision and an advantage of lowest cost operations. This helped Essel acquire Propack - which propelled Essel to the top.

Main reasons to opt for Joint Ventures: Lower risk Option
Joint Venture with the local partner will lower the risk as the local partner knows the local market, the local partner has greater capability to attract talent, has the necessary contacts/links with the local government, and provides an entry into new markets.

Unfortunately, JV also has the highest failure rates - if the venture becomes successful, one partner will try to muscle out the other, or if the venture fails, the partner tries to blame the other. Having a well defined exit strategy is vital to prevent a painful breakups.

Green field Ventures

Establishing green field ventures is a core competence for several Indian companies. Tata group for example has setup several green field operations in South Africa, Kenya, Nigeria, Sri Lanka, Vietnam, etc. Mahindra & Mahindra has setup new operations in China to make tractors.

Indian companies have been very prudent when expanding into newer territories. Indian management lays a great emphasis on integrating the overseas operations first. Only when the management gets a feeling of comfort that the overseas operations is fully integrated, Indian managers will look for further acquisitions.

A classic example of this prudent expansion is Asian Paints - 2nd largest manufacturer of decorative paints. Asian paints started global expansion in 1999. Initially this was done via small acquisitions in Egypt, Sri Lanka etc. This was followed by well managed integration and then a green field expansion. By 2003, the company had enough expertise and experience to play a bigger role in acquisitions - it acquired Berger International. This acquisition gave Asian paints a global reach to market its products over 70 countries.

According to Ashwin Dani, MD of Asian Paints: "We have rolled out a mega operational efficiency initiative which focus on productivity, safety, environment, reducing losses, planning & Control systems. So the message is clear - you should constantly adding value to your acquired operations"

Closing Thoughts

These risks have not decreased Indian companies appetite for acquisitions. Understanding these risks have prompted Indian companies to approach cautiously towards acquisitions - starting with small, less than $30 Million, all cash acquisitions in late 1990’s - Indian companies have progressed steadily to multi-billion dollar acquisitions. Several Indian business houses have built a dedicated capability for acquisitions: Tatas, Ranbaxy Laboratories, Dr. Reddy Labs, Wipro, Ruias, Videocon, Kalyani etc. Past successful acquisitions have also added to the confidence levels of Indian firms.

While Indian firms are expanding abroad - more global giants are entering India. Global Retail giants, Banks, Insurance companies, manufacturing firms - cars, tyres, consumer goods, heavy engineering, chemicals etc. - all are eager to enter India. Some are forced to enter into joint ventures with Indian companies due to legal legislation while others are pondering on how to enter Indian markets.

International business fraternity has finally recognized that Indian firms are credit worthy and has the expertise to successfully manage global assets. This confidence can be seen how willing the banks are willing to help Tata Steel to acquire Corus.

Indian companies have just started venturing abroad. In the next decade, lot of Indian multinationals will be listed in the Fortune-500 list of companies. As a vanguard of things to come, Infosys is now listed in NASDAQ-100 index - the first Indian company to achieve this fame.

Also See:

  1. Cultural Assessment - Prerequisite for successful Mergers
  2. Challenges of Working Across Cultures
  3. China’s Globalization Plans off to a rocky start
  4. Build a Multilingual Web Site to cater to your Global Customers
  5. Why Build a Global Website
  6. Improved Cross-cultural Communication Increases Productivity
  7. Managing Global Careers - Dealing with Culture Shock
  8. Keep Overseas Staff Focused on the Right Goals
  9. Trans-cultural Business Failure: Wal-Mart Exits Germany
  10. Making Multicultural Virtual Teams Work
  11. Virtual Scale - Alliances for Leverage


ruchika said...

very good articles, i would like to have wonderful thought from you on emergenge of equity investment in india. predominantly by indian public. this i require for my research if you can extend your helping hand

.....Life is bullying ;) said...

Great consolidation on MNCs and M&A. To put it so succintly is an art.

murali said...

its simply superb article thanks brother

rohit said...

really it's a fantastic article given by him...... thanks

divya said...

nice flow of info. thanks for the article..... Can you give some details on how Indian MNC's can flourish in the future.....