india going global.indd - The IIPM Think Tank

MERGERS & ACQUISITIONS
Ltd, tractor & utility vehicle manufacturer, among others.
These deals are symbolic of the evolving Indian businesses
making a mark in the global market place.
Investment Scenario:
SIX MONTHS (JAN-JUNE) OF CY 2007
• No. of Merger & Acquisition Deals : 339
• Total value of deals $44 billion
• Number of domestic deals have been 167
• Value of domestic deals $1.6 billion.
• The number of inbound cross border deals: 51
• Value of inbound deals $14.5 billion
• The number of outbound cross border deals: 121
• The value of outbound deals : $28 billion
• Private Equity investments : $6.8 billion
Deals - January to December 2006:
• Total deal value $28 billion, a growth of 54% compared
to $18 billion in 2005
Mergers & Acquisitions - $20 billion through 480 deals,
growth of 24%
• Cross border deals - $15 billion through 266 deals
• Inbound deals - $5.4 billion through 76 deals
• Outbound deals - $10 billion through 190 deals
• Private Equity investments $8 billion, compared to just
$2 billion the previous year
• Foreign Direct Investment - $12.5 billion (April – January
2006-07)
Volume to Value Game: Go Global
On the other hand, the increase in deal values, with the
average deal size for M&A deals increasing to $130 million
in H1 2007 from $48 million for the same period
last year points to the fact that the year 2007 is on track
to be a year of ‘mega deals’. The deals so far have already
captured more than $40 billion, twice as much as last
year and four times more when compared
to the corresponding period.
While last year the focus was on the
volume of deals, 2007 will be more
value driven and is expected to touch
the $100 billion mark.
The key to these mega deals is not to
provide short-term increase in earnings
per share or for that matter, a great yield of shareholder
value because there is too much risk involved. There is risk
of the price being paid, as the valuations of the acquired
companies could be far in excess of those of the acquiring
companies. And the biggest risk in M&A deal is not the deal
itself, it is the post merger integration and there is still a lot
of lack of experience in Indian companies. As ambitious
as they are, they are not quite global as yet.
Inorganic paths are
the way to get the
scale and the longterm
benefits
Having said that, if Indian companies want to go global
and do want to hit the kind of scale you see, not just from
the top companies in India, but globally fortune 100 companies,
you have to buy that growth.
Tata Steel could not have gone from six million tonne
capacity to 25 million tonne without acquisitions. Inorganic
paths are the way to get that scale and the long-term
benefits, even mid-term benefits will be there provided you
can get the cost rationalization, the synergies, and the full
through effect on the bottomline and therefore a positive
effect on EPS.
The Risk Effect:
The immediate reaction to such deal announcements is the
‘Stock Prices’ of the acquiring companies drop as investors
perceive a high degree of risk in the acquisitions and
a premium price being paid by Indian companies a bit too
high. Investors tend to be cautious, as I said the biggest risk
in merger & acquisitions (M&A) deals were not the deals
themselves, but the post-merger integration.
Notwithstanding the negative short-term reaction, there
are obvious long-term benefits of achieving global scale
– new markets and new customers; high-end intellectual
property of either process technology or product technology
patterns of some kind and skill-sets. Such acquisitions also
add incremental value to the acquirer’s brand, the ability to
serve the customer close to a point of need and of course,
getting economies of scale. This in the present day can
be achieved through inorganic means and that attracts a
premium.
Premium Justified:
The premiums paid are, in some way, a bet on the execution
capabilities of the acquiring company to get those cost
synergies. The one company I would bet on being able to
get the integration cost down is Tata Group. It is a company
that has been brilliant in execution pretty
much so far. They have paid a premium
price, probably very close to the top end
of their desired price for Corus Group
Plc, but Tatas have the recognition that
the world is getting smaller and if they
want to be globally competitive, they
have got to keep up with the likes of
Arcelor-Mittal, the world’s largest steel maker formed as
a result of the merger of Arcelor S.A. with Mittal Steel
Company, N.V. in 2006.
At the high end of any price, and that goes pretty much
across the board whether it is the deals by Aditya Birla
Group, Tata Group or Vodafone and Suzlon Energy, all
those deals are critically dependent on the post-merger integration
strategies.
July-October - 2007 Need the Dough
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