india going global.indd - The IIPM Think Tank

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. The
malaise that had gripped Deal Street till is now a distant
memory. The 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
The 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. They 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.
The 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
The real thing
happened in
1991 and old
corporate
empires felt
the heat of
competition...
and financial objectives. They 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. There 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. The first wave lapped our shores in the 1980s.
The first corporate raiders landed - the likes of Swaraj Paul,
Manu Chhabria and R.P. Goenka. The 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. The 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. The 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. The
third wave splashed its way through the corporate landscape
after Y2K. There 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. There 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 global flavour. It could be
foreign private equity coming into Indian companies, like
July-October - 2007 Need the Dough
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