It all seemed very ‘big’ when Indian firms set out in search of targets. In 2006, for instance, when Dr Reddy’s Labs acquired German firm Betapharm for $570 million, it was hailed as the largest ever foreign acquisition by an Indian company, closely followed by Suzlon’s acquisition of Belgium based Hansen for $565 million.
However, barely a year on, Tata Steel undertook the largest-ever buyout of a foreign entity – Corus – for a whopping $12 billion.
While few could match the grandeur and scale of these acquisitions, it’s only now that reality has begun to kick in. The market has fallen significantly since, with a ripple effect on valuations. Thus, profitability estimates, based on which such deals were struck, do not hold true in the current economic environment.
Even the ‘diversification’ strategy that they had in mind seems to not have stood them in good stead now. The true test of viability is in a downturn, but most companies ventured into Europe and the US rather than emerging nations, which have been least affected by the global economic crisis. The objective, it appears, was more to de-risk their business from the vagaries of the Indian market and achieve global scale than achieve growth.
The biggest hit, however, has come from using debt both in domestic and foreign currencies to finance these global sojourns. While it is easier to service debt during the good times, debt servicing can wipe off a significant chunk of operating profits in a lean phase.
All in all, while acquisitions abroad have inflated the top line for most Indian companies, their contribution to the bottom line has been miniscule; in some cases, even negative. However, not all companies that have ventured abroad have had a negative experience to report, though. Those like Sun Pharma, United Phosphorus and Tata Tea have been able to use their foreign acquisitions to top-up revenues and profitability without a corresponding rise in debt.
An Economic intelligence study Group did some number crunching, and decided to run a health check on India’s leading multinationals. They have zeroed in on companies that have substantial foreign assets and operations, deriving around 50% of their consolidated revenues from foreign subsidiaries.
Bharat Forge is probably one of those companies where the sector is badly hit, both in India and abroad. It couldn’t reap the benefits of acquisition even during the boom. In FY08, its Indian unit accounted for over two-thirds of consolidated profit, four years after its first acquisition in 2004.
The recent economic slowdown hit its overseas operation harder than its domestic business. It reported a consolidated loss of Rs 36 crore mainly because of its foreign operations. In this scenario, globalisation drive has actually amplified the financial and business risk, rather than reducing it as initially intended.
Crompton Greaves (CG) has acquired a number of foreign companies, mainly across Europe, to expand its global reach. Its overseas operations witnessed an average sales growth rate of 45% as against about 19% for its domestic operations, for nine months ending Dec’ 08.
Unlike many other big-ticket acquisitions, CG’s foreign operations contribute modestly to its bottom line. In fact, the profit (for 9 months ended Dec’ 08) of its overseas operation grew by nearly 90% as against 26% for domestic business. Though its overseas operating margin is improving, it still has sometime before it catches up with the domestic one.
DRL (Dr.Reddy’s Labs) has acquired companies in UK, US and Germany during 2002 to 2006. However, the loss making Betapharm ate into the bottom line of the company and rendered its overseas profit margins volatile. Restructuring of the German operations by shifting of manufacturing to India and other cost control measures have led to recovery in the overseas profit margins.
The company now intends to gradually exit some of the very small distributor-driven markets such as Vietnam, Trinidad and Haiti and realign its focus on certain key geographies.