Rise of the takeover king

Indian M&A

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India is in the middle of an M&A boom. An increasingly open economy, a slowdown in manufacturing, a new company takeover law and the maturing of Indian capital markets where minority, mostly foreign institutional shareholders now have clout, have combined to make deals happen. A new breed of young, dynamic and self-confident Indian companies, mostly in the services sector, has emerged to change the face of corporate India.
The stock market capitalization of new companies in information technology, software services, media and telecom businesses has now far surpassed the old, family-owned manufacturing conglomerates. Driven by falling market valuations, the lumbering giants have begun shedding weight while the high-flyers, buoyed by fancy stock prices, are in an acquisitive mood. A spate of M&A deals has ensued broked largely by three Indian investment banks that are joint ventures with American banks. They are DSP-Merrill Lynch, JM Morgan Stanley and Kotak Mahindra Capital, a Goldman Sachs affiliate.
But Indian M&A has not followed the same route as deal frenzies in some western markets. High interest rates in India mean that companies are rarely being bought using debt. A notable exception is the leveraged buyout of Tetley, the British tea company, by Tata Tea, part of one of the oldest Indian conglomerates, for $434 million, which is being financed by foreign debt.
Cash rather than share swaps are preferred as the acquisition currency by old, family companies because they hate the idea of outsiders sitting on their boards.

Among the rising Indian magnates involved in M&A is Subhash Chandra of Zee Telefilms, who bought out Rupert Murdoch in three media joint ventures in a $296 million deal last September, assuming full control over India's largest private satellite broadcaster. Says Nandan Nilekani, managing director of Infosys, a software services company that listed on Nasdaq last year: "We now have a global currency to go for acquisitions." Infosys has sought approval to buy overseas companies worth up to $10 billion.
In November, soon after its debut on Nasdaq, Satyam Infoway acquired IndiaWorld, an internet portal, for $115 million in cash. In mid-February it sold ADRs on Nasdaq, raising around $130 million to help finance that deal. In December, HDFC Bank, one of India's high-tech private banks set up to showcase economic reforms, announced a merger with Times Bank to create India's largest private bank.
In less spectacular fashion, India's family-owned businesses have proven they are in serious restructuring mode. The Tata group sold part of its controlling stake in ACC, India's second-biggest cement manufacturer, to Gujarat Ambuja in a Rs4.5 billion ($103 million) deal in which the financial adviser was Bank of America. Earlier, it hived off a cement division for Rs5.5 billion to French company Lafarge in a deal involving DSP-Merrill Lynch. Its acquisition of Tetley, advised by Rabobank, makes it one of the largest tea companies in the world.
Others among India's family-controlled groups that are making waves are the AV Birla group which bought up several men's clothing brands recently and Gujarat Ambuja, which pinched DLF Cements from under the nose of Lafarge in deals worth Rs3.5 billion each.
Bankers attribute the surge in M&A deals to a change in corporate mindset. Hemendra Kothari, chairman of DSP-Merrill Lynch, says: "Today it's all about building shareholder value; just creating assets will not do." That India's fastest-growing industry - software services - has virtually no physical assets has driven that point home.
Nimesh Kampani, chairman of JM Morgan Stanley, who clinched the two cement deals for Gujarat Ambuja, adds: "Asset prices have fallen and this is bringing enterprise back into older businesses. The younger generation in the family is ready and able to force change."
But rock-bottom prices don't make many deals as sellers prefer to hold on. Premal Parekh, executive director of JM Morgan Stanley, points out that it is no coincidence that the deals that have been simmering for a while are being clinched today when the economy and stock markets are on an upturn. "Businessmen are more confident about taking investment decisions today." Gujarat Ambuja, which was mulling over acquiring DLF for a year, reportedly paid a much higher price to keep Lafarge from acquiring the company.
Foreign buyers, however, are wary. "Hostile takeovers by foreign companies are out," points out Rajeev Gupta, head of M&A with DSP Merrill Lynch. Most Indian companies have used expensive debt to fund growth in the past. "As part of restructuring, Indian companies want to deleverage to improve their profits," says Rana Kapoor, managing director of Rabobank. This has two implications for M&A: it means that companies are more likely to hive off loss-making businesses to pay off debt and new acquisitions will be paid for with equity.
Sunil Gulati, head of investment banking at Bank of America, which financed Ambuja's acquisitions with a bridge loan says: "Interest rates in India are high making debt, including leveraged buyouts, an expensive option". This also means that buyers such as Ambuja and Satyam Infoway, who plan to sell new shares soon, must be ready to dilute their core shareholding.
For family-owned businesses, this poses problems. Even though equity may eventually be the currency used for acquisitions, most of the recent deals have been paid for in cash rather than share swaps, partly because sellers such as the Tatas need money to buy up other companies. Also, points out Shahzaad Dalal of ILFS, which advised DLF: "Indian family-owned companies are uncomfortable about giving a seat to another business family on their company boards."
After this M&A round, how it works for shareholders will determine how many other deals follow.

No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

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Rise of the takeover king

Indian M&A

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