With the advent of globalisation, the Indian businessman is open to opportunities across the world. What is it that is driving more and more Indian companies to seek and acquire businesses at home and abroad?
The reasons are various, and industry and firm specific, but a study of M&A deals during 2005-2007 reveal that the desire for growth is at the heart of an Indian M&A. A significantly higher number of deals occur in sectors that are in the growth phase of their life cycle.
Acquisitions both across border and domestic are the quickest way to growth; some executives argue that sometimes it is the ‘only way to growth’. A merger or an acquisition brings immediate access to a newer and wider market which would take years to develop going by the organic route.
Industries like Pharma, Engineering and IT are driven by these considerations. For some companies, access to a new product or technology allows them to leverage over their existing customer base thereby increasing their market hold. It has been observed that acquisitions are an option even for new entrants in an established market who want to score quickly.
A variation on the theme of market access is the acquisition of select capabilities such as product range, processes and people which allows the player to compete in a new segment of the market. Tata Motors acquisition of Daewoo Commercial Vehicles in early 2004 is a prime example of a strategy to gain entry into the market for higher horsepower trucks.
It seems like acquisitions are becoming the ‘quick-fixes’ that companies need to consolidate their positions in the world market! Besides providing a stimulus for growth in terms of scale and scope, another strategy for Indian firms has been vertical integration which enables them to make their products more competitive and have more control over their pricing power.
The growth strategy of Tata Steel is a good illustration. To take advantage of low-cost iron ore and coal in India, it planned greenfield projects in Orissa and Chahattisgarh, acquired Natsteel to make the semi-finished steel and sold it in Singapore thus creating a fragmented value chain.
London based Corus was primarily acquired for access to their technology/ Tata Steel were aware that Corus, being in a high cost country would not be able to deliver primary steel for too long at competitive prices.
Technology acquisition is a huge driver, especially for cross border M&A activity. Indian companies are realising that to compete and cater to the international market they need to have access to the latest technology. For years joint ventures were their only option and even then, the JV partner would never give the Indian partner access to cutting edge technology, thereby always being one step ahead.
Today, after years of hand me down technology, the automobile ancillary sector is finally shunning the JV route and heading towards Europe and the US to acquire the latest technology in their field, be it composite plastics or precision gears.
The latest credit crunch is another driver that is emerging and will play a big part in increasing deal activity. Private Equity firms will be looking to liquidate their investments, leading to good quality assets being available in the market.
While growth, be it in market share, pricing power, market access or building competencies, is the underlying factor for M&A’s in India, the biggest driver for an M&A in mature markets is to achieve scale and scope (better asset utilisation, reduced duplication of resources, enhanced negotiating power and sharing of best practices).
Financial engineering tapping surplus debt capacity at the acquired company, leveraging tax advantages and reduced working capital allows a better return on equity, driving up evaluations. Indians are becoming more savvy acquirers, which is laudable given the short time they’ve been around in the M&A space.
They are well aware of the trade-offs involved and have teams dedicated to evaluate both targeted and walk-in deals giving importance to both. Pre-deal assessment has moved beyond due diligence and companies spend time in identifying performance opportunities in the target company to make the deal more profitable.
Market assessment, performance gap analysis, financial engineering possibilities, cultural differences and likely pre and post integration issues are being included in these assessments. Most companies use external agencies (lawyers, investment bankers, management consultants etc) at different stages of the entire deal process and are confident of their capabilities for executing M&A deals both domestic and cross border.
Their credibility is increasing and they are no longer perceived as ‘not being good enough’. Instead they are looked at as mature players who not only have the courage and skill required to execute deals but also the necessary deep pockets to fund them.
Some of the more prominent acquirers have built their own M&A teams that originate, execute and integrate transactions allowing for continued focus on the transaction long after the high of acquiring it has passed, allowing for increased potential and value creation in the long run.
Indian investment banks are also strengthening their capabilities by opening up offices in target markets to source targets directly and widen their networks. Indian talent is second to none; many Indians have thrived in difficult and unfamiliar conditions. Indian corporations also discovered that their conservative past left them with substantial leveraging space to fund their growth aspirations.
In conclusion, compelling drivers, increased capabilities and a favorable environment, allow Indian companies to pull off an M&A of any nature and scale. The growth strategy is clearly here to stay and India will continue to learn growing into full fledged multi-national companies.