Tuesday, May 5, 2009

Indian Acquisitions Abroad

(In the following post, Rajvendra Sarswat, an Indian lawyer, examines the current trends in acquisition activity in India, with particular reference to overseas acquisitions by Indian companies)

The news of an Indian company making any global acquisition or financing any project might have been surprising few years back, but not anymore. In the year 2006, for example, Indian companies announced around 125 foreign acquisitions with a value of nearly $10 billion. That was roughly eight times that of the year 2000. However, the first 5 months of year 2007 witnessed a deal size of around $ 15 billion, with over $12 billion coming from the Tata-Corus deal alone and with further large acquisitions in the pipeline. There were reportedly 35 deals between India and the developed economies in the second half of 2007, following on from 34 in the first half.

It is noticed that Indian corporates have continued to act prudently since the credit crunch commenced, taking advantage of the retraction of financial buyers and the depreciation of the dollar to push their growth agenda. Further, the trend is greater in manufacturing companies, followed by technology, IT support services and business process outsourcing. Infrastructure development was a sector that received enthusiastic attention from the early days of Indian liberalization. Overseas investment by Indian companies has increased in Europe in particular. India is now counted among the five largest investors in British companies and equities. The African and Middle-East markets have also become hotspots for Indian companies. Consequently, the trend towards global penetration by Indian corporations and banks can be seen in recent years.

If we talk about how the trend is shaping, we can see few factors, which are evident. Leaving apart the Satyam fiasco, India has created a stronger corporate governance image and has improved industry standards, regulatory mechanism, easy availability of finance and governance. These initiatives have encouraged foreign investment and domestic consolidation in several sectors and industries. This trend has been particularly visible and pronounced in the banking sector. Indian economic and regulatory parameters are today accepted at par on global levels. Liberalization has been providing constant boost for attracting international investment with aggressive change in policy and dynamic attitude of Indian entrepreneurs to magnetize global focus on Indian economy. Indian strong capital and debt market has made it easy to raise funds for acquisition.

With the growth of the Indian economy at an average rate of 8.8 per cent every year, it may just prove to be an additional reason, which triggers the growth in overseas investments. Tax havens also feature significantly in the Indian acquisitions. In recent times, sustained growth in corporate earnings has boosted the profitability and strengthened the balance sheets of Indian companies. In the past few years, big and small Indian companies in every sector have been expanding their footprint beyond Indian shores, which is conferring global image and reputation on Indian companies. This has, in turn, strengthened their credit ratings and ability to raise funds overseas.

The liberalization of investment limits outside India and change in restructuring process that many companies underwent over last few years have given them more confidence to meet the global challenge. Further, keeping in view the increasing demand and the scarcity of natural resources in India, many Indian companies in the public sector are investing heavily in oil fields and natural resources driven industries abroad. The outsourcing phenomenon, especially in IT Industry has helped Indian companies in a lot of direct and indirect ways.

The Indian market has been less affected by the global financial turbulence as compared to other western countries and still Indian economy is a promising and ideal investment destination and cost effective. India is a promising land, with an abundance of large projects at various stages of conceptualization, a hundred or so power projects, scores of telecom projects, many infrastructure deals adding as catalyst to boost the growth. Moreover, it has ensured that Indian managers and executives are now far more exposed to western business culture and practices. Over a period of time, the Indian offshore companies have created an image of reliable low cost, yet high quality products and services.

There are several dangers or impediments in acquisitions abroad funded fully by Indian interest. First, the global economy today is inter-related in such a way that instability of one economy has an effect on other country. Further, though acquisition by Indian corporates is increasing globally, it is identified that Indian entry in cross border acquisition is still not easy which results in higher acquisition costs. Tax, on the other hand, as an impediment determines how much return one would bring home at the end of the day. Being a new entrant in the global race of acquisition, India has its own teething problems. Foreign regulatory and economic uncertainties further complicate planning and operations. These all have adverse effects on profitability and return on owners' investment, which affects the foreign acquisition.

The most interesting deals can be found in sectors like telecommunication, infrastructure, pharma, retail etc. In telecommunication sector, cross border deals involve FDI issues, license agreements issues, regulatory issues and other commercial issues which make these deals very challenging and interesting. In pharma deals there are multiple issues relating to patent licensing, regulatory approval and several intricate issues that make them exigent.

The most significant of the deals that took place recently would be the acquisition of ONGC Videsh’s of UK listed Imperial Energy for US $ 2.6 billion. Another significant acquisition is Tata Motors acquiring Jaguar and Land Rover worth US $ 2.3 billion. The GMR Infrastructure’s US $1.1 billion purchase of a 50% stake in InterGen was the largest acquisition of a global energy utility by an Indian company to date. The acquisition of Canada based Novelis by Hindalco involved transaction of US $5,982 million. Tata Steel acquired Corus Group plc. and the acquisition deal amounted to $12,900 million. In the pharma sector, Dr. Reddy's Labs’ acquisition of Betapharm through a deal worth of $597 million and Ranbaxy Labs’ acquisition of Terapia SA through a deal amounting to US $324 million were significant. Suzlon Energy acquired Hansen Group through a deal of $565 million. The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million. HPCL acquired Kenya Petroleum Refinery Ltd. The deal amounted to $500 million. VSNL acquired Teleglobe through a deal of $239 million.

When it comes to mergers and acquisitions deals in India, the total number was 287 from the month of January to May in 2007. It has involved transactions worth US $47.37 billion. Out of these 287 mergers and acquisition deals, there have been 102 cross-country deals with a total valuation of US $28.19 billion. Indian mergers and acquisition activity totaled around US $ 19.8 billion in financial years 2008 as compared to US $ 33.1 billion in financial years 2007. The reason of such decline was in line with the global slowdown. The average size of deals in 2008 was US $ 23.4 million, far lower than that of the US $ 70.5 million in 2007. Cross border acquisitions totaled to US $ 8.2 billion in 2008 after declining of 56.3% from the previous year, where the same was US$ 18.7 billion.

Hence, looking at the economic instability presently, though it appears that it might take a while for Indian market to gain its momentum back, once it stabilises, there are prospects for long term growth with positive impact.

- Rajvendra Sarswat

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