Despite the overall financial constraints and limited convertibility (mainly on trade account) of Indian Rupee, domestic companies have made some progress to register their global presence at a time when overseas corporate predators are constantly exploring opportunities to take over both established and promising Indian entities in India. Global M&A experts suggest that India-bound M&A value in 2010 could touch a record level of $ 55-60 billion. Under the circumstance, India Inc must try to launch a counter M&A offensive, even within its limited financial resources, for its business defence. India’s resourceful business managers must accept the challenge.

A strategic corporate asset could mean anything or everything the acquisition and development of which could help a company play a leadership role in both domestic and global markets. A strategic asset for an Indian steel company could mean investment in steelmaking abroad, acquisition of new technologies and production processes, raw material resources such as coking coal, iron ore, dolomite, chromites, etc. An oil company could acquire new oil fields, directly or through joint ventures. Overseas multinational companies (MNCs) are investing billions of dollars in India to acquire strategic assets in every major sphere of business, industry and trade – from energy, automobile, industrial products such as cement, tyres and lubricants to consumer products, etc – to expand local as well as global presence in their respective areas of interest. For instance, almost all major refrigeration and air-conditioning units in India, barring those owned by Godrej and Voltas, belong to overseas investors like LG, Samsung, Whirlpool, Electrolux and Haier. Similarly, global cement giants have lately strengthened their presence in India by a series of acquisitions of cement units, including those belonging to big domestic names like Ambuja and L&T. Lately, Indian pharma companies have become a foreign take-over target.

Indian companies are said to be sitting on a cash pile of about US$ 75 billion. Most of them have necessary management skills to acquire and manage corporate assets abroad. While top public sector enterprises are rather shy of making investments abroad, others have been too conservative about foreign acquisitions. ONGC, through its subsidiary ONGC Videsh, has made some progress in setting up equity-oil ventures abroad, but it could have been more aggressive and do more. The PSUs such as Indian Oil Corporation, Steel Authority of India Limited (SAIL), Coal India, National Aluminum (NALCO), Gas Authority of India (GAIL), National Thermal Power Corporation (NTPC), and Bharat Heavy Electricals (BHEL) are quite capable of expanding their business network by acquiring and building assets abroad. They have surplus funds and enjoy high credit rating. Of course, the government needs to be more open and supportive to such moves. India is terribly short of energy resources such as coal and hydrocarbon. The PSUs in these fields need to be more aggressive to acquire additional capacities elsewhere and ship the products back home at the very least to meet the domestic demands.

Thanks to Bhatri Airtel’s $10.7-billion acquisition of Zain Africa, India Inc’s total spend in mergers and acquisition abroad this year (January-September) looks impressive - $24.8 billion. It is a matter of opinion, though, if Bharti Airtel’s mega foreign acquisition is of any benefit to India. The highly cash-rich telecom company is majority foreign-owned and the African acquisition helped its overseas shareholders siphon out a good portion of Bharti’s liquid asset from India for a risk investment in Africa. Minus Bharti Airtel, the gross value of India’s outbound M&A during the first nine months of 2010 is only $14.1 billion. On the contrary, overseas entities spend nearly $32 billion in acquiring corporate assets during the nine-month period. India Inc is constantly losing its corporate assets to overseas entities while it has been extremely slow in acquiring assets abroad. The size of the global M&A market is huge. It expanded further after the economic melt-down of 2008 in the western world. And, US MNCs continue to be leaders in global M&A market.

China Inc, which is sitting on a cash pile of over one trillion dollars, is, on the other hand, the third largest global player in M&A, after the USA and the UK. The total value of the China-related M&A during January-September, this year, is estimated at $137.4 billion. Chinese energy companies are aggressively acquiring strategic assets in all parts of the world. The Chinese industry has a strong financial backing from state-owned Chinese banks and the government, offering inter-governmental soft loans, for acquisition of strategic assets outside. China’s appetite for devouring overseas hydrocarbon, construction and mining companies as also telecom equipment, capital goods and consumer electronics companies is really high. Even Brazil is way ahead of India in M&A deals, striking contracts worth $122 billion during this period. Much of the Brazilian deals, however, are also inbound. India’s large external borrowing and widening trade deficits do not leave much elbow room for the government to provide the necessary financial support either through large bank guarantees or more traditional bilateral aid route to India Inc to help acquire corporate assets abroad.

The timing and valuation are important to the success of M&A for an acquirer. India Inc, a comparatively new player in the global M&A market, lacks experience in both the key areas, timing and valuation. Some of its big ticket acquisitions in Europe and the USA took place at a time when the market was high. The acquisitions include those by Tata Steel, Tata Motors, Dr Reddy’s Laboratories and Bharat Forge. The Tatas are since having trying times managing erstwhile Corus plants in the UK and Jaguar Land Rover units in a recession hit market. But, these things are not easily predictable. Like mutual funds, M&As become hit when the market is bullish, the investor confidence is high and bank credit is easily available. India Inc is going through the learning curve. Companies seeking to expand abroad through the M&A route are expected to do their homework better in terms of the timing of acquisitions and valuation of assets in future.

Meanwhile, the speed with which inbound M&As are currently taking place may slow down if the stock prices in the Indian bourses continue to remain bullish making acquisitions too expensive to become commercially viable. The Indian secondary market is attracting too much external investments raising stock prices of good companies beyond sustainable limits. Acquisitions at such high prices, which have nothing to do with the net asset value per share, could prove to be unworthy or risky. Globally, shrewd investors and corporate raiders prefer the time of economic recession and bearish stock market to acquire low-priced underperforming assets for business consolidation and expansion. For such moves, companies are required to maintain special purpose liquid assets or ‘war chests’. Several Indian companies, both private and state-controlled, are sitting on such liquid assets which can be judiciously used to acquire new assets in countries such as the USA, Canada, the UK, Mexico, China, South Korea, France, Italy, Spain, Vietnam, Indonesia, Australia, South Africa, etc. The only way good Indian companies can counter the threat of inbound M&As is to go outbound to balance the situation.(IPA Service)