Not long ago, any claim that Indian manufacturers could make acquisitions abroad would have been dismissed as wishful thinking. Cheap IT services and software development might some day make India a global player in the services industry but it had clearly missed the opportunity in manufacturing.
In recent months, though, India Inc has embarked on a shopping spree overseas and, surprisingly, the shoppers are top Indian companies that include a truck maker, a metals company, a pharmaceuticals company and an auto component manufacturer.
Tata Motors, India's biggest truck manufacturer, is buying Daewoo's truck business in Korea for $125 million; pharmaceuticals company Ranbaxy will pay about $60 million for the generics business of French company RPG Aventis; and metals manufacturer Hindalco, part of the Birla group, has acquired Mount Gordon Copper Mines in Australia. The list goes on: Bharat Forge signed a memorandum of undertaking on November 21 to buy Carl Dan Peddinghaus (CDP) of Germany for about $30 million; Sundaram Fasteners acquired Dana Spicer in Europe; and petrochemicals company Reliance has made a $211 million bid for Flag Telecom. In addition, two Indian IT companies announced smaller acquisitions last month: I Flex will buy US company SuperSolutions for $11.5 million and Nasdaq-listed Infosys will buy Australian company Expert Information Services for $22.9 million.
Growing ambitions
Most of the deals are still relatively small, but they are growing in size and ambition. Tata Tea's purchase of Tetley for around $430 million three years ago is still the biggest cross-border Indian acquisition. Recent acquisitions have been in developed markets such as the US, UK, France and Germany. Several Indian companies faced tough competition from foreign rivals.
"Indian companies have the cash and confidence today to go overseas. With $98 billion in foreign exchange reserves, the regulatory environment at home is less restrictive," says Udayan Bose, managing director of Lazard India.
Gaining access to key markets is what drives many Indian acquirers overseas, particularly Indian pharmaceuticals, auto component and software services companies that have a competitive advantage in the global market. "Indian pharmaceutical companies have a global competitive advantage as a supplier in the generics market, particularly in the market for active pharmaceutical ingredients, and companies such as Ranbaxy need market access," says Sughosh Moharikar, head of mergers and acquisitions at Kotak Bank, a Goldman Sachs affiliate.
Earlier, in July, Wockhardt acquired CP Pharmaceuticals of the UK, and Nicholas Piramal, an Indian pharmaceuticals company, was among bidders for Aventis. France is the third biggest market for Ranbaxy and managing director DS Brar hopes the Aventis acquisition will position Ranbaxy as a leading player in a French generics market that is growing annually by over 30%.
Bharat Forge says the CDP acquisition will make it the second largest forging company in the world. It is already a major supplier of chassis components to BMW, Volkswagen, Audi, DaimlerChrysler and Volvo. BFL chairman Baba Kalyani says: "The CDP acquisition will help BFL strengthen and expand its business in Europe through the addition of prestigious new customers, and build new business with existing customers through deeper relationships and enhanced technology capability. This is especially true in the case of the passenger car segment, where CDP has a large presence."
I Flex, a Bangalore-based IT company hopes its US acquisition will open the US market for Flexcube, its flagship banking technology product, and Infosys says Australia is a key future market.
Last year Mphasis BFL, an IT service company, acquired a software development company in China from Capital One to help it access the Japanese market. Bangalore-based Wipro acquired US-based Nervewire. "These companies are globally cost competitive because they get the back-end work done out of India, but they need the front-end distribution and marketing skills overseas," says Rajeev Gupta, head of mergers and acquisitions at DSP Merrill Lynch.
Another group of Indian acquirers are conquerors of the home market that must now grow abroad. "For Indian companies that are leaders in a consolidated market at home, the next round of growth can only come from abroad. Where the home market is fragmented, such as in cement, the acquisitions happen at home," says DSP Merrill's Gupta, the adviser to the Daewoo acquisition by Tata Motor. The ambition of the biggest Indian conglomerates, the Tatas, Birlas and Reliance to gain a foothold abroad has pushed deal sizes up over $50 million.
Tata Motors has a dominant 45% market share in India, and overseas expansion will help insulate it against a domestic downturn. It wants to increase revenues from overseas to 25% from around 5% now.
Colourful expansion
Asian Paints is the largest Indian paint manufacturer and exporter, with an annual turnover of $340 million. It already has 11 international joint ventures, and it announced in September that it would make a partial general offer to buy a controlling stake in Singapore-listed Berger International from Ariza Holdings for $12.6 million.
Problems of overcapacity and the resulting crash in prices have thrown up opportunities to buy distressed assets in the global telecoms infrastructure industry. "Reliance is looking to be a fully integrated telecoms provider, and the acquisition of Flag Telecom will provide international gateway access which will position the company in the long-distance telecoms services market," says Amit Kumar of ANZ Investment Bank.
The advantage of being able to source globally, like multinational competitors, is what drove Hindalco to acquire copper mines in Australia. Public sector companies such as Oil and Natural Gas Company and Gas Authority of India have picked up minority stakes in fields in Sudan, Vietnam, Sakhalin in Russia, Myanmar and Egypt.