PANORAMA A“M&A”ZING INDIA 8 Need the Dough July-October - 2007
MERGERS & ACQUISITIONS “We are slowly but surely moving from a regime of “large number of small banks” to “small number of large banks.” <strong>The</strong> new era is <strong>going</strong> to be one of consolidation around identified core competencies. Mergers and acquisitions in the sector are <strong>going</strong> to be the order of the day” –Excerpt from speech by Mr. V Leeladhar, Deputy Governor of the Reserve Bank of India, to Kanara Chamber of Commerce and Industry, Mangalore (March 11, 2005) Mergers and acquisitions activity is heating up in India at par with its counterparts across the globe as the Indian companies go on a buyout rampage as a means to strengthen their <strong>global</strong> footprints. This acquisition spree by Indian companies, though as not fervent as Chinese, has still been a major contributor to the Mergers and Acquisition activity across the continents. <strong>The</strong> fact being significant here is that most of the Chinese acquirers are Government-owned, while acquisition by Indian Companies are notably private initiatives. And, what might be the reason for relatively high Indian interest in the buyouts and takeovers Simply put, the annual turnover of companies in India has been rising at a steady pace of about 25-30% in last 5-6 years, which adds up to the profitability of the companies and enviable reserves. With copious cash reserves under their bellies, the ideal expansion strategy for Indian corporations (especially for the large ones like Infosys, Tata and Reliance) is to expand <strong>global</strong>ly to meet their hunger for control, growth and diversification. Before we proceed further in this direction, let’s fi rst have a quick recap at the evolution and growth of Mergers and Acquisitions activities in India over past few years. Recap: <strong>The</strong> Indian economy has undergone a major transformation and structural change during the past decade or so as a result of economic reforms introduced by the Government of India (since 1991) in the wake of policy of economic liberalization and <strong>global</strong>ization. In this liberalized era, size and “core competence” have become the focus of every business enterprise. Naturally, this requires companies to grow and expand in businesses or processes that they understand well. Thus, leading corporate houses have undertaken massive restructuring exercises (M and A being one of them) to create a formidable presence in their core areas of interest. <strong>The</strong> corporate sector increasingly resorted to Mergers and Acquisitions due to significant gains they entail in terms of synergy, economies of scale, better fi nancial and marketing advantages, diversification and reduced earnings volatility, improved inventory management, increase in domestic market share, and above all capturing fast growing markets abroad. Since such a restructuring exercise should promote fair competition for the overall benefits of shareholders and consumers, regulations were thought to be necessary to govern this exercise. <strong>The</strong> SEBI, therefore, notified the, ’Takeover Code in February 1997, which laid down the rules, which govern corporate takeovers in India’. Initially, it was necessity that compelled Indian Companies to venture into industries abroad, when companies like Oil and Natural Gas Corporation embarked on the acquisition journey so as to meet their demands by securing Oil fields. But, the motives of mergers and acquisitions have changed over time ranging from monopoly of Technological Expertise, Control over the entire Value Chain to mere diversification to increase the risk spread in this era of <strong>global</strong>ization. <strong>The</strong> second wave of M and A activity represented general consensus towards M and A being a good means of consolidation. <strong>The</strong> steel giants, communication sector and Sahara-Jet deal being the highlight of this wave which is <strong>going</strong> to continue for some more time in the coming months. And very soon, what might capture the Markets, as I see, would be a third wave impelled by the need to grow and diversify which will be impelled largely by the Services and Real Estate/Infrastructure sectors. Mergers and acquisitions activity is heating up in India at par with its counterparts across the globe July-October - 2007 Need the Dough 9