It is a common knowledge in industry that increases in volume (of production) reduces costs and maximizes profits. So how is this possible? By expansion, setting up new plants or outsourcing from other plants. None of these are practical or economical. The best method successful industries are following is through Acquisitions and Mergers. Industries are planning to hive off some of their businesses which do not form a part of their core business strategy. Such businesses can be acquired by companies which form a part of their core business strategy. That is how the businesses are acquired and volumes increase.
Governments play an integral role across the world, not just in protecting consumers but also in supporting and facilitating transactions. Bodies like the Federal Trade Commission in the US and the European Commission in Europe focus on anti-competitive behavior that restrain trade that can harm consumer welfare. The Central Government takes responsibility for the same in India under the Competition Act of 2002. Competition law is still nascent in India and was tested during the Jet–Sahara transaction. Just recently, M&A guidelines have been tightened in the telecom sector which makes it difficult for any of the top service providers of India such as Bharati Airtel, Vodafone and Reliance Communications to merge.
In India, the government limits the amount of Foreign Direct Investment (FDI) in specific industries which acts as a barrier to inbound M&A with the aim to protect domestic industry. In cross border deals, one of the main problems against doing deals in India has been the government’s apathy and legal red tape. India need to be more careful not to lose out to other high growth markets as they become more accessible.
The government can take on the role of an advisor and facilitator, as we saw in the Arcelor- Mittal transaction, where it vocally supported, and even intervened at certain points in dealing with the French government. For India Inc’s continued growth, the government has to be actively involved have more conducive regulation, less bureaucracy and a more transparent approach to regulate domestic and cross border deals.
It is obvious that optimum value extraction is the interplay of multiple factors ranging from the management of a company to the role of the government. CAGR for the last 4 years has been 51% — the question is, will India able to sustain this? Not just global markets, but India too seems to be reeling under fears of the credit squeeze with the deal value falling 71% in the first three months of the calendar year.
Not a very good start, but we can turn this around and leverage global events to our advantage. As we mentioned earlier on in the series, the credit squeeze should open us to more cross border opportunities as companies globally look to liquidate their assets thus making available good assets at competitive prices. Another angle is to look at markets that have high growth potential like ours, for example South Korea and Vietnam. While the large mature markets of the west are attractive and comparatively easier to get into, we need to diversify and explore opportunities in other countries.
Thus, in order to keep ahead of the game, Indian players, especially established leaders should move in quickly and more broadly into emerging markets to curb upcoming competitors. Like somebody once said, “Cross-border acquisitions are like potato chips. You seldom want just one”. Prudently applying lessons learned from our, albeit short, past; we should be able to take India Inc to higher levels of success and excellence. —