Difficulties in a Cross border acquisition

In their hurry to become global powerhouses, Indian companies often prefer the acquisition route as the many prominent foreign acquisitions of recent times demonstrate. Some of the reasons for the spurt in foreign acquisitions, such as the desire to compete on the world stage and the need to grow beyond the scale possible in India, are solid.

The favorable Indian economic environment, fat profits, higher valuations, and weakening of government regulations on overseas acquisitions have all helped in successful takeovers. However, the recent spate of high-profile acquisitions by Indian companies has led to a national euphoria.

For example, “The Empire Strikes Back” was a common headline in Indian press coverage of the purchase of the iconic British brands, Land Rover and Jaguar, by Tata Motors.

This national pride means that Indians have also been quick to take offence when they have encountered resistance by target companies such as Arcelor, Jaguar or Orient-Express. More reflective Indians may have noted that hostile takeovers of Indian companies by foreign companies are almost impossible within the current regulatory framework in India.

The current nationalistic euphoria prevailing in India needs to be tempered as it can induce corporate over reach. The tribalistic rivalry between the large family controlled groups that dominate Indian business has the potential to turn into a race to win status by snapping up ever-larger trophy assets. In India’s closely knit business community, it is almost becoming a kind of fashion statement for companies to make foreign acquisitions.

The result may be that Indian companies embark on ever more audacious international mega deals, inspired by aggressive empire building ambitions rather than by solid commercial logic and careful appraisal of investment returns that have characterised past Indian acquisitions abroad.
The impetus for many of the acquisitions in 2006–2007 was not that the Indian companies were particularly globally dominant in their industry or rich. Rather, one of the primary facilitators was the easy liquidity prevailing in the markets. Big deals based on easy liquidity however tend to load a company with debt or dilute shareholders equity through the needed issuance of new stock. Both Tata Steel and Hindalco were put on a credit rating watch after they announced their foreign acquisitions. For both companies and for Suzlon, the announcement of cross-border deals saw immediate drops in their stock price.

With the financial crisis of 2008, one can safely say that for the foreseeable future, gone are the days when acquirers could use the assets, and at times even the cash flow, of the target company as collateral. We are back to traditional conservative practices for now when lending institutions will ask for the core assets of the acquiring company, at 50-90 % of actual valuation, as the collateral. This will slow down the cross-border M&A activity that we have seen from Indian firms between 2001- 2007.

The foreign acquisitions experience of other Asian countries , like Japan and China, also indicates a high failure rate. Therefore, there is no reason to believe that India’s success rate will be significantly different.

Indian foreign acquisitions have typically sought access to technology (product innovation capabilities), brands and distribution. However, product innovation and branding are creative functions, which have to be managed differently than the efficiency driven manufacturing function.

Indian firms are excellent at optimising existing businesses by squeezing economies and managing costs. But innovation, and even branding to some extent, requires “waste” as it is hard to predict which idea will ultimately succeed.

Furthermore, unlike the quick payback one can obtain by pursuing efficiency gains, product innovation and branding have to be managed with much longer time horizons. These are finely tuned functions, and integrating them smoothly into existing businesses is hard enough even for experienced operators; doing so across borders is harder still.

The short-term business culture combined with a typically top-down corporate model controlled by a single all-powerful leader still prevails too frequently in Indian companies. These attributes work well for serving the volatile local market, which requires speedy decision making, and for managing efficient manufacturing systems. But these are not the ideal attributes for firms seeking innovation with a creative workforce and inspirational processes. Nor are they appropriate for complex multinational organisations, staffed by a culturally diverse workforce with their own values and a puzzling habit of doing things their own way.

Indian managements are becoming seriously stretched as they integrate complex acquisitions in different time zones while managing their businesses in a domestic market under attack from foreign competition. Foreign acquisitions increase execution risk dramatically, especially since Indian companies lack experience in absorbing international businesses with different corporate cultures and employment rules.

The hunger to become a global powerhouse may not always be matched by a company’s current capabilities. In the case of both Japan and Korea, it took several decades to build the required capabilities.