India's hunger for foreign deals remains unabated

India's hunger for foreign deals remains unabated
By Andy Mukherjee, Bloomberg Published: December 16, 2007, 23:12


India's openness to global trade and investments has seen a remarkable increase in recent years. In the year ended March 31, the sum of money flowing into and out of the country rose to $913 billion, or 110 per cent of gross domestic product.

As late as 1997, annual flows had amounted to only 50 per cent of GDP, says Ajay Shah, an economist at the National Institute of Public Finance and Policy in New Delhi. "India has changed beyond recognition," he says.

The progress is perhaps best reflected in the speed with which Indian companies are buying businesses overseas. So far in 2007, foreign acquisitions have amounted to more than $39 billion, a fivefold jump from last year. The biggest purchase this year - and in India's corporate history - was the $12.8 billion leveraged buyout of Britain's Corus Group by Mumbai-based Tata Steel.

While a liquidity crunch in the leveraged-loan market could rule out a similar big acquisition in 2008, the smaller deals might be even more numerous next year as the Indian economy, barely affected by the subprime-related credit crisis in the West, continues to power ahead.

India doesn't have the sovereign wealth of an Abu Dhabi or Singapore, whose state-sponsored funds recently bought large stakes in Citigroup and UBS respectively. Nor is the overseas expansion of Indian companies spearheaded by government-owned companies looking to capture energy resources.

Private sector
Private entrepreneurs are driving the agenda in India, with state-owned oil companies making a few small investments, such as Bharat Petroleum's purchase this year of a 20 per cent interest in an Australian exploration area in the Timor Sea. Just because Indian acquirers have scant links to the state, their journey to Western boardrooms isn't a cakewalk.

Out of the three companies vying for Ford Motor's Jaguar and Land Rover brands, two bidders - Tata Motors and Mahindra & Mahindra - are Indian carmakers. A recent report in the Wall Street Journal cited the head of a US trade body representing Jaguar dealers as saying that the perception of the luxury brand may take a beating if it was owned by an Indian company.

The financial clout of Indian companies has grown to a point where it's impossible to stop them with snobbery.

Last year, Arcelor chief executive officer Guy Dolle had ridiculed the takeover bid by Mittal Steel by saying that the steel made by Indian-born Lakshmi Mittal was like eau de cologne when his company produced perfume. Investors judged the cologne to be good enough to be merged with the perfume.

Mittal's success in building the world's biggest steel empire - ArcelorMittal - with acquisitions around the world has been a tremendous source of inspiration for Indian entrepreneurs.

But ambition alone isn't enough. Several other forces have come together to make Indian acquirers strong contenders for global assets.

The modernisation of the country's equity market and the loosening of capital controls have improved Indian companies' access to finance while a strengthening rupee has made overseas assets more affordable for them. At the same time, the import tariffs that protected local manufacturers from foreign competition have come down significantly. The only way domestic producers can now compete is by going global themselves.

That is, increasingly, the strategy that even midsized companies are pursuing.

Suzlon Energy, a maker of wind turbines based in Ahmedabad, Gujarat, has seen its assets grow six-fold in two years through acquisitions of Germany's Repower Systems and Hansen Transmissions International, a Belgian gearbox maker. The company is now the world's fifth-largest maker of windmills and expects to become the third-biggest by 2010.

"The remarkable thing about Indian companies is that they have huge aspirations to be global companies,'' Tarun Jotwani, chairman of Lehman Brothers Holdings's Indian operations, told Bloomberg in an interview this month. "They're extraordinarily confident about buying companies abroad and integrating them with their companies in India. We think the pace will pick up."

Jaya Prakash Pradhan, an economist at the New Delhi-based Institute for Studies in Industrial Development, has found that 75 per cent of the money spent by Indian companies on overseas acquisitions since 2000 has been in manufacturing. By the number of deals, the pharmaceutical industry is the clear leader, followed by transport equipment and chemicals, he says.

All these industries are skills-intensive, in line with the core competence of India's homegrown entrepreneurs. Together with computer software, these businesses will continue to be at the forefront of corporate India's expansion overseas.