Post, Foreign Acquisition strategies of India Inc.

Havells set its global footprint with acquisition of Sylvania for $300 million. Its top line tripled after this deal and the acquisition worked very well during boom time. However, during slowdown its foreign operation was badly hit. Though the sales growth was slightly better, more than proportionate rise in operating expenses pulled back the operating profit significantly.

It has reported consolidated losses for last two quarters, mainly on account of its overseas operation. The acquisition has become challenging for the company due to changed economic conditions. However, it can still expect to benefit from the acquisition, although with a time lag.

Soon after the Tata-Corus deal Hindalco acquired Novelis for around $6 billion. The acquisition has not been successful so far with Novelis continuing to make losses. Also, there is not much of integration synergy between two entities.

So far, the company has not been able to recover anything out its investment since Novelis generates negligible (or negative) cash even at operating level. Current impact of economic slowdown on its Indian operation would only add a pinch of salt to Hindalco’s overseas pain.

Punj Lloyd’s international acquisitions like Singapore-based SembCorp and Technodyne have not benefited much to the company. December quarter has been very bad for its overseas operation with a loss of around Rs 300 crore.

However, the results of previous quarters indicate that the contribution of these foreign operations to bottom line was reasonably good. It has taken higher debt on its standalone balance sheet rather than the consolidated one. One has to keep an eye on the performance of these acquisitions once global economy recovers.

Ranbaxy, the eighth largest generic company in the world, has made a spate of acquisitions starting from US based Ohm Laboratories to Romania based Terapia and South African player Be-Tabs among others. In 2006, Ranbaxy’s foreign asset base of $1.1 billion formed 60% of its total assets.

While the company’s foreign operations have been profitable, the forex losses in recent quarters have impacted the profitability of the company’s standalone operations. Moreover, the recent setback received by the company in its US operations has adversely impacted the company’s overseas business.

With six overseas acquisitions and one pending, Sun Pharma has been one of the fastest growing companies in the Indian pharma space. Acquisition of loss making US-based Caraco marked Sun’s first overseas acquisition in 1996. The company has since then acquired some loss making or under performing companies and managed to turn them around.

Helped by foreign acquisitions – Belgium based Hansen Transmission and Germany based Repower – Suzlon Energy has grown to be the fifth largest wind power equipment manufacturer in the world. After an initial phase of generating poor profit margins post the acquisition of Hansen in FY07, Suzlon seems to have recovered and managed to witness higher sales realization.

However, the going again seems to have got tough with significant currency fluctuation leading to MTM and charges related to blade retrofitting. If the company manages to control these exceptional items in coming quarters, its acquisitions can certainly be termed as value accretive.

Tata Chemicals’ $1 billion acquisition of US-based General Chemical Industrial Products Inc (GCIP) in March 2008 has enabled it to become the world’s second largest maker of soda ash. Earlier in 2006, the company had also acquired Brunner Mond, a UKbased chemical company.

These acquisitions have cut down its cost of soda ash and greatly increased its profitability. Moreover, the acquisitions have been earnings accretive right from their very first year of operations.

Tata Communications has acquired a number of foreign companies over last five years . All these acquisitions, though have given it a global presence, negatively impacted its profitability. Its consolidated operating margin declined from 19% in FY06 to around 10% in FY08.

Its overseas subsidiaries are still bleeding and would take a while before making any significant contribution to bottom line. Most of these acquisitions were funded through debt and interest on these borrowings take away 18% of its consolidated operating profit.

Tata Steel acquired Corus in the beginning of FY08 at a whooping $12 billion. The company has already managed to generate operating profit of more than $4 billion from its European operation. Had this global crisis not broken, probably the company would have recovered its investment in another 5-6 years.

The company is trying to improve the operating margins of Corus from its current 9-10 % to 15-20 % in future. Acquisition of raw materials in different parts of the world, improvement in operating efficiency and integration of different functions across subsidiaries are some of the steps taken.

Tata Tea is perhaps the earliest of the Indian companies to become multinational with acquisitions like UK-based Tetley and Good Earth among others. It is now the world’s second largest manufacturer and distributor of tea. The profitability of the company’s foreign operations has been better than its business in India.

The operating profit margins of its foreign business are also significantly higher than those registered by the company’s standalone operations. Since the company’s major large acquisitions have been done 4-5 years ago, the company does not have to face the problems that other Indian multinationals are facing due to change in the market cycle.

United Phosphorus has grown from leaps and bounds in recent years through its overseas operations. The company acquired Cerexagri in France, Netherlands-based Advanta, CEQUISA in Spain among others.

The company’s acquisitions have been beneficial in expanding its footprint, increasing its cash generation ability, in achieving faster growth in profitable regulated markets and reducing its dependence on the monsoon-sensitive domestic market.

The restructuring of its French and Spanish operations is going to increase the company’s profitability. There’s one lesson in this for India Inc: Watch out before you take the big leap overseas. While acquisitions considered abroad during bullish periods may look feasible and profitable, the feasibility of these acquisitions have to be evaluated, keeping in mind the business cycles can take a sharp turn.

As for investors, a long-term perspective on the stock of Indian multinationals is a pre-requisite, as the benefits of synergies arising from the foreign acquisitions would only accrue over a longer period.

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