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Indian Companies on an Acquisition Spree Overseas

Friday, July 22nd, 2011

Indian companies are no longer the frogs in the well of the licensee-raj era. They have transformed into long distance birds, flying out of Indian business boundaries to find new markets and potential companies for acquisition, merger and investment.

A decade back, the news of acquisition overseas by an Indian company would have created ripples, generated glee as well as raised eye-brows; but now, it has become the trend and the norm. The confidence level of Indian companies has grown manifold, and they have become more adept at successfully acquiring and managing companies overseas. “Indian companies are now more experienced in dealing with overseas M&A transactions and are considered serious contenders for acquiring global businesses,” Mahad Narayanamoni, a partner in the corporate finance division of Grant Thornton, said in an article published in the Financial Times.

For a little more than a decade now, the cash rich Indian companies have been on an acquisition spree, and that has added considerable value to Brand India. A report by Columbia University finds that India has emerged as the world’s 21st largest outward investor, with more than US$75 billion in overseas investment in the past decade. During 2009-10, the investments by domestic companies in overseas joint ventures and wholly-owned subsidiaries stood at US$10.3 billion, as per the Reserve Bank’s report. This data shows a rosy picture of Indian business against the backdrop of the global economy that is still recovering from recession.

The first major acquisition was of the popular U.K. brand Tetley, for US$407 million, by Tata Tea in 2000. At the time of the acquisition, Tetley had three times the turnover of Tata Tea in India. It’s now the flagship brand of Tata Global Beverages (formerly Tata Tea) and is present in over 70 countries across the globe, offering around 500 different tea varieties. In the last decade, Tata Global Beverages has purchased more than ten overseas beverage firms at a cost of over US$1.5 billion. The company acquired Good Earth, a US maker of green and herbal teas in 2005, and US-based firm Eight O’Clock Coffee for US$220 million in 2006. It also bought a third of Joekels, South African tea producer, in 2006. Tata Global Beverages is currently the world’s secondlargest branded tea maker. Last year in May, it was reported that Tata Global Beverages is eyeing acquisitions in America and Eastern Europe. In a bid to re-enter the vitamin water space, the company also has acquired a minority stake in US-based beverage and bottled water firm Activate.

Over the years, Indian companies have become bolder in their approach, and have acquired and invested in companies that are much larger at the global business platform than their India-based ones. One of the biggest takeovers to date was Tata Steel’s purchase of British steel company Corus for US$12.1 billion in 2007. At the time of acquisition, Corus was five times bigger than Tata Steel, and was ranked eighth largest in the world. The acquisition propelled Tata Steel, ranked 65th, to the fifth place in world steel production.

The Tata Group returned to U.K a year later to acquire luxury car brands Jaguar and Land Rover from Ford Motors for US$2.3 billion. Both luxury car brands were draining Ford financially. The post-purchase talks from industry experts were full of skepticism. Yet earlier this year, Jaguar Land Rover announced record-breaking sales performances in March from key international markets, specially the UK, China and India. The company said that Jaguar and Land Rover combined were up 6 percent globally in March and 13 percent ahead of 2010 for the first quarter. Phil Popham, director of group sales operations of Jaguar Land Rover, says that despite a challenging business environment, Jaguar Land Rover is flourishing on a global scale, with March sales reflecting the confidence consumers have in the company’s brands and products Within two weeks after Tata struck a deal with Corus, Aditya Birla Group announced the takeover of Canadian Novelis for around $6 billion by its flagship company Hindalco Industries. Today, Hindalco and Novelis, based on their combined strength, are the world’s leading aluminum rolled products producer.

“Indian companies have been acquiring foreign companies, and when they do, the studies show those companies perform better,” notes Peter Cappelli while writing a blog piece, Indian Companies: Doing Well Because They Do Good, in Harvard Business Review.

The wind of business has started to blow from east to west, and who could have thought that once upon a time a colony of the British Empire would return in the shape of Tata Group to become the largest employer in the U.K. The story of acquisition is not limited to a handful of companies, or to particular service and product areas. Several leading Indian companies are acquiring companies in a wide range of areas, including FMCG, minerals, chemicals software, engineering hospitality, agriculture, oil and gas, pharmaceutical, telecommunications, and more.

Indian companies are also exploring the African continent for opportunities to invest in agriculture. Thus far, investments worth $3 billion have been made in Ethiopia, Kenya, Mozambique, Senegal and Madagascar to produce a wide variety of food crops and also cultivate food crops that can be used to make biofuel. To the governments of African countries, the Indian Government is providing cheap lines of credit to encourage land acquisitions.

Also, since the Indian telecommunications market is almost saturated, major Indian telecom players are formulating acquisition strategies to enjoy African Safari and explore untapped markets for business growth and expansion. Last year, Bharti Airtel bought the African operations of Kuwaitbased Zain for US$10.7 billion, reportedly the largest overseas acquisition in Africa by an Indian company. Thanks to this acquisition, Bharti Airtel now has a presence in fifteen African countries.

Additionally to secure mineral flow for their industries, especially coal and iron ore resources, Indian companies are increasingly looking outward. Ernst and Young’s study notes that the Indian companies have turned aggressive in the span of a year and have invested considerably in mineral resources. For the first time, India-based companies have scored winning points over Chinese counterparts in the acquisition of overseas mineral assets, notes the study. Indian companies invested US$4.64 billion in 2010 to acquire companies overseas, and in comparison, Chinese outbound investments declined by more than half to US$4.45 billion.

India’s largest private sector oil refining and production group Reliance Industry is eyeing major acquisitions in the U.S. ONGC, in 2009, took over the control of U.K. firm Imperial Energy for £1.3 in 2009. It was one of the biggest overseas acquisitions by ONGC Videsh (OVL), the overseas arm of ONGC. State-run explorer Oil India, last year, indicated its plan to buy shale gas assets in the United States and Australia. In what is seen as the single largest investment by an Indian company in Australia, Adani Enterprise acquired the Australian coal assets of Linc Energy in a cash and royalty deal worth US$2.7 billion.

Some other major acquisitions of recent times include the acquisition of the Grosvenor House Hotel by Sahara India -- considered to be one of the highest profile international acquisitions; the flagship company of Venkateshwara Hatcheries Group, Venky, acquired the 135-year old English premier division football club, Blackburn Rovers; the Essar Group-owned back-office firm, Aegis, acquired Actionline, one of the largest BPO firms in Argentina; Dabur India acquired Turkish personal care products company Hobi Kozemtik Group; and more.

Some of the factors that are driving this acquisition spree are access to global markets; the urgency to secure raw materials; global brands in the company’s portfolio; acquisition of assets abroad to supplement domestic resources; access to innovative technology with international companies; and the growing demand for valuable natural resources.

It’s not always a smooth sail for Indian companies seeking to acquire or invest in companies overseas. Each country has its own regulations and often, they turn out to be the biggest stumbling block in overseas takeovers. The acquisition talk between South Africa’s MTN Bharti Airtel failed mainly because of the regulatory requirements and the South African government’s objection to the deal. Locals are also often hostile toward a foreign takeover, fearing losses of jobs and change of management. Also, there are potential cultural rift issues that Indian companies have to face.

Indian business still has a long way to go before it becomes omnipresent, to the point where Indian brands gain the same world-wide respect and umbrella/product brand recognition that companies like GE, Shell, Apple, Nokia, Microsoft, Coca Cola, and others get and boast of. Currently, Indian companies are still setting up their bases overseas. It will take some years before they begin to show the profit evaluations from present acquisitions. However, there is no denying that Indian companies have become ambitious and adventurous, and they are confident about successfully expanding their operations worldwide. The confidence reflects the attitude of the new Brand India.

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