Beneath the headlines

Indian businesses completed overseas deals worth $10 billion in 2006, but it is the UK mid-market where the country's influence is most felt.

Indian businesses completed overseas deals worth $10 billion in 2006, but it is the UK mid-market where the country’s influence is most felt.

Tata’s acquisition of steelmaker Corus confirmed India’s arrival as a major international M&A player, but it is the UK mid-market where the country’s influence is most felt.

For Indian newspaper headline writers, conglomerate Tata’s recent £5.75 billion acquisition of Anglo-Dutch steelmaker Corus was an opportunity too good to miss.

When the deal was confirmed in February, sub-editors quickly wheeled out the puns. The Hindustan Times headlined with Signed, steeled, while The Indian Express came up with Singing the Corus. Meanwhile, The Times of India decided on India On Song, Takes Corus Along.

The media’s positive reaction to the deal reflected its importance, not only to Tata’s influence in the industry – it is now the fifth largest steelmaker in the world – but also to the country’s perception as an international M&A player.

Indian deal makers have increasing confidence in the international arena, buoyed by an economy growing at more than 9% per annum. But it is not just giants like Tata on the acquisition trail, the bulk of deal making activity is among small and mid-market players.

There were 190 overseas deals completed by Indian businesses in 2006, worth a combined $10 billion [£5.14 billion], according to the Hindustan Times. The majority of this was in Europe, according to Bundeep Singh Rangar, chairman of IndusView, an India-focused cross-border advisory firm. He said that in 2006, 60% of cross border M&A involving Indian acquirers was towards Europe and of this, 90% was UK-bound.

Sandeep Gill, a partner at accountant Deloitte in India, added that Indian businesses are a major presence in company auctions. “Whenever there is an acquisition of a mid-cap company in the UK, especially if it is in IT or IT enabled services… automotive components or generic pharmaceuticals, you will always have an Indian company on the list of [potential] buyers,” he said.

Indeed, these three industries – IT, automotive and pharma – are expected to be at the forefront of India’s international M&A activity in 2007, according to Rangar. All three are experiencing double-digit growth – parts of the IT industry are expected to grow by as much as a third this year – and have the cash reserves to make acquisitions. “They could be sitting on £100 million – £120 million in cash,” he said.

Cash is often the preferred method of financing a deal, because Indian deal makers know that the company’s stock will be more valuable in time and so cash is less expensive, according to Rangar.

A foreign currency convertible bond, where Indian debt is placed overseas in a foreign currency, is also a popular way to finance deals, Rangar added.

Broad horizons

Indian businesses are looking to overseas acquisitions for several reasons, from simply winning more customers to gaining access to high technology patents, which can also improve their competitive position domestically, Rangar said.

But Indian businesses are not only looking to acquire successful companies, they are also targeting those in turnaround situations, according to Deloitte’s Gill. These businesses, typically in the $5 million to $15 million deal value range, often have scope for efficiency savings, especially in terms of moving certain functions to India, where the cost base is lower, he added.

But moving functions to India post-acquisition is not confined to turnarounds. “The typical concerns of a target company in Europe or the UK is the fear of job losses or the movement of manufacturing or back office to India,” Rangar added. “To some degree that’s valid because one reason why the UK or European company is less profitable or in some cases unprofitable is because of a high cost base, so if they don’t get that cost to a place… where the cost is better they will not be able survive.

“That is the nature of globalisation and the fact that to be cost competitive you have to have a better cost base.”

It is India’s low cost base that is helping to fuel its fast-growing economy. While some commentators have voiced concerns that the economy is growing too quickly and may soon overheat – and impact on overseas M&As – Gill dismisses these fears. “The Indian economy’s growth is based on strong fundamentals,” he said. “The strongest of those is domestic consumption. As long as domestic consumption remain[s] at the current levels and continues to grow as it is… I don’t think the economy is going to overheat at all.

“We might see growth tailing off… but it will still be higher than most developed economies around the world and definitely as high as any of the other emerging economies.

“I don’t see things changing that drastically and everyone [I] speak to in business is extremely upbeat about the prospects.”

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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