IN FOCUS Corporate Consolidation Activities–Indian Perspective 46 Need the Dough July-October - 2007
MERGERS & ACQUISITIONS Baffled Consider this – `Have cash, will buy` - the breezy motto of India Inc. Deal mania has gripped India Inc. Every week seems to bring news of some headline-grabbing deal or the other. In June 2007, total value of overseas deals by Indian Companies exceed inbound deals with an average deal size of $107 mn. <strong>The</strong> malaise that had gripped Deal Street till is now a distant memory. <strong>The</strong> economy is on steroids and capital is furiously coursing through its veins - it could be a corporate M&A, PEs, IPOs. Business assets are being bought and sold like never before. And, to add a happy twist, wannabe Indian MNCs are picking up targets in the US, Europe and Asia. `M&A is now a core art of India Inc`s growth strategy` – is the conclusion of survey-based report of AT Kearney and the Wharton School of University of Pennsylvania. Using financial data from 10,000 corporates over a span of three years, they showed that 72% of India Inc`s value growers, those who have grown both in terms of revenue and shareholders value, have employed an M&A led strategy. Grant Thornton India in a separate survey-based report concluded that “81% of respondents look M&A as a part of strategy or will look at it opportunistically.” Why has there been a spurt in deals in the recent years <strong>The</strong> red-hot economy is the obvious starting point. India is likely to end the year with GDP growth in excess of 9 per cent. It will be the third consecutive year of fast growth, a rarity in our economic history. Confidence is sky-high. But the mere urge to buy and merge is not enough. You need money for the job. Companies and private equity investors are sitting on large piles of cash. “Companies focused on restructuring between 1997 and 2003. <strong>The</strong>y cleaned up their balance sheets. Now, companies are cash-rich and business confidence is skyhigh. Add to this the easy availability of funding options and you have what seems like a winning formula. This explains the frenzied activity we have witnessed in recent months,” says Praveen Kadle, Tata Motors’ executive director and CFO. Truly said, in this era of LPG (Liberalisation, Globalisation and Privatization) M&A has become a buzzword in the Indian corporate world today. In mathematics 1 + 1 is always equal to 2 but in corporate world it has always been an endeavor to make 1+1 =3. This is exactly what we define as synergy effect. It is the very reason why M&A has become so popular today. <strong>The</strong> uphauling of the industrial policies in India’s agenda for economic reforms has resulted in a radical change of environment for the private corporate sector, boosting in the process, a market for corporate control characterized by M&A and similar corporate consolidation activities. M&A are undertaken by corporates to achieve certain strategic <strong>The</strong> real thing happened in 1991 and old corporate empires felt the heat of competition... and financial objectives. <strong>The</strong>y involve the bringing together of two organizations with often disparate corporate personalities, cultures and value system. Success of mergers may therefore depend on how well the organizations are integrated. <strong>The</strong>re are a variety of stakeholders in the merging entities that have an interest in the success or mergers. Shareholders and managers are two critical players of this corporate strategy but others who have an interest in the success of mergers include employees, consumers, local communities and the economy at large. M&A may also adversely affect competition, an anti-thesis to the movement of LPG. Though this branch of law is in its infancy in India, but many countries have an effective mechanism to regulate corporate consolidations that have anti-competitive implications. Burst and Wave Pattern: One of the striking aspects of mergers and acquisitions as a phenomenon is that they occur in `Bursts` interspersed with relative inactivity. This pattern is called the `wave pattern`. This pattern of M&A has been observed in US for over last 100 years, in the UK from the early 1960s; and continental Europe very recently. In Indian context, this is the fourth wave of corporate deal-making. <strong>The</strong> first wave lapped our shores in the 1980s. <strong>The</strong> first corporate raiders landed - the likes of Swaraj Paul, Manu Chhabria and R.P. Goenka. <strong>The</strong> first mega public issues, too, hit the markets. This was the era of the first tentative reforms under Rajiv Gandhi and the birth of largescale corporate ambition. Companies were hemmed in by all sorts of licensing restrictions, and buying a company was one obvious way to grow. <strong>The</strong> real thing happened in 1991 and old corporate empires felt the heat of competition. Conglomerates that had built sprawling and unfocused business portfolios were forced to sell non-core businesses that could not withstand competitive pressures. <strong>The</strong> Tata, for example, sold their soaps business to Hindustan Lever. That was the second wave of M&As, largely built on the theme of corporate restructuring. <strong>The</strong> third wave splashed its way through the corporate landscape after Y2K. <strong>The</strong>re was a round of consolidation in key sectors like cement and telecommunications. Companies like Bharti Tele-Ventures and Hutch bought smaller competitors and built national networks. A new type of deal also made its presence felt - Venture Capital. Money poured into start-ups, especially in technology and IT services. <strong>The</strong>re were large IPOs in this round too. So how is this fourth wave different from the three previous ones It is the first time that India has seen so many deals with a <strong>global</strong> flavour. It could be foreign private equity coming into Indian companies, like July-October - 2007 Need the Dough 47
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