Hindalco Industries is a flagship company of the Aditya Birla Group, one of the biggest names in corporate India. Tata Motors likewise is at the vanguard of the Tata flotilla. They have more in common than just that. In March this year, Tata Motors made international headlines when it acquired iconic brands Jaguar and Land Rover from Ford Motor Co. for around US$2.3 billion. Aluminum major Hindalco’s moment of global glory was in February 2007 when it bought Atlanta-based Novelis — a leader in aluminum rolled products and aluminum can recycling — for US$6.4 billion.

The two Indian companies have just completed rights issues in the domestic market. The objective of the fund-raising exercises was to finance the takeovers. And, in keeping with their newfound penchant for doing things together, both the issues were disasters and had to be rescued by underwriters and promoter group companies.

The villain of the piece is the price at which the rights issues were on offer. For Tata Motors, the issue was at US$6.80 per ordinary share (US$6.13 per share in a twin issue with lower voting rights). The total amount sought to be raised — US$833 million. Hindalco had a plain vanilla issue for US$1 billion, at US$1.92 per share. The share prices dipped below these levels while the issues were on; it was cheaper to buy directly from the market than subscribe to the rights. After both issues fell short of expectations, the prices are now scraping rock bottom. (The entire market is also down, of course.) On Friday, October 25, Tata Motors closed at US$3.26 and Hindalco at US$0.87.

Consider another yardstick. Tata Motors has a current market capitalization of US$1.26 billion, down 79% in one year. Theoretically, that’s what the company is worth. Hindalco is valued somewhat lower at US$1.07 billion, down 75%.

Takeovers clearly carry a bad odor at the moment and the market is in a punishing mood. While these two scrips are down some 75% apiece, the overall market — as measured by the Bombay Stock Exchange sensitive index (Sensex) — has fallen only 50% since October last year. And the mauling of companies that have been on a takeover trail is not restricted to just this pair.

Suzlon Energy has announced a US$360 million rights issue to buy Portuguese conglomerate Martifier’s stake in REpower Systems AG. The share price has fallen 74% in the one month since the announcement was made; its one-year loss is 88%. (The issue was subsequently called off because of the adverse response.)

Tata Steel, which took over Corus for US$12.1 billion in early 2007, is in the dumps. Rating agency Standard & Poor’s has revised its outlook on Tata Steel UK — the Corus unit — from positive to stable. Tata Steel has fallen 80% in one year.

More recent deals are unwinding. Sterlite Industries, the Indian arm of London-listed metals conglomerate Vedanta Resources, has walked away from its US$2.6 billion deal to buy Asarco, a U.S.-based bankrupt copper miner. With plummeting copper prices, the economics no longer justify the price. Sterlite will probably have to pay a penalty of US$50 million for reneging on the agreement.

Elsewhere, the high-decibel bidding for foreign assets seems to be tapering off. Software consultancy major Infosys Technologies had made a bid of £407 million for UK-based enterprise software player Axon. When the Delhi-based HCL stepped in with a £441 million offer, Infosys quietly withdrew from the fray. “There have been only a couple of large outbound acquisitions in the past couple of months that have hit the news,” says Srivatsan Rajan, partner in Bain, a global business and strategy consulting firm.

M&As — a Dying Breed?

So are outbound mergers & acquisitions (M&As), in which Indian companies acquire foreign assets, a dying breed? One school of thought says that, for some time at least, it’s a closed chapter. The other school feels it is business as usual. “I think both are right,” says Rajan. “The deal market will go through a dormant phase primarily because of volatility in valuations and the squeeze in the credit markets. However, deal flow continues to be very strong as there are some very high-quality companies that are potentially becoming available. Smart Indian companies should be getting ready to take advantage of that once the markets settle down.”

“I think this is a temporary setback, the world over, rather than for India in particular,” says Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based Indian School of Business (ISB). Adds Narayanan Ramaswamy, executive director of KPMG Advisory Services, an international network of professional advisory firms: “Globally there is going to be a slump, a wait-and-watch period. It is not at all surprising. But I don’t think that corporate India has lost its appetite for acquisitions.” Sudip Banerjee, CEO of L&T Infotech, who earlier was president (enterprise solutions) at Wipro Technologies, is even more positive. “There are a lot of cross-border M&A deals that have taken place and more are in the offing,” he says. “Even our company is looking at such deals and I know about a few other deals which are currently going on.”

The numbers can be interpreted in different ways. The BusinessWorld-Thomson Reuters M&A deal tracker lists only one deal of any significance in October (up to October 20) in which an Indian company has been involved. This is the US$505 million purchase of Citigroup Global Services by Tata Consultancy Services (TCS). But this is essentially Citi’s India-based captive business process outsourcing arm, so it does not qualify as an outbound merger.

The Grant Thornton deal tracker, a widely-followed newsletter, seems to indicate a slowdown of sorts in September. “The total number of M&A deals announced in September 2008 stands at 35 with a total announced value of US$3.69 billion as against 31 deals amounting to US$4.63 billion in August 2008,” notes the report. “The most significant deals have been Daiichi Sankyo increasing its stake to 58% (through an open offer) in Ranbaxy Laboratories for US$1.7 billion followed by UAE-based Emirates Telecommunications buying a 45% stake in Swan Telecom for US$900 million and Suzlon Energy increasing its stake to 86% in REpower Systems AG for US$390 million.

“There were nine domestic deals (both acquirer and target being Indian) with an announced value of US$40 million and 26 cross-border deals with an announced value of US$3.65 billion. Twenty of the cross border deals were outbound (Indian companies acquiring business outside India) with a value of US$1.03 billion, and six were inbound (international companies or their subsidiaries acquiring Indian business) with an announced value of US$2.62 billion. The total number of M&A deals during the first nine months of 2008 stands at 381, with an announced value of US$26.43 billion as against 527 deals amounting to US$49.33 billion during the corresponding period in 2007. The total number of M&A deals announced during 2007 stood at 676 with a total announced value of US$51.11 billion.”

The Delhi-based IndusView, a research and advisory firm focusing on multinationals seeking to enter India, has dug into the numbers further and come up with interesting findings. “The significant aspect of the M&A activity has been India Inc.’s eyes on global opportunities, which have become more prominent in the backdrop of the global recession,” says IndusView chairman Bundeep Singh Rangar.

“Indian companies with a war chest of cash reserves — such as Infosys with reserves about US$2 billion; ONGC (Oil & Natural Gas Corp.) with a similar amount; Tata Sons, the holding company for the Tata Group’s investments, with reserves and surplus of more than US$2.5 billion — have become active acquirers in the market,” adds Rangar.

The other highlights of the report, which relates to January-September 2008, are as follows:

  • Indian companies’ overseas acquisitions worth US$14 billion outpaced their global counterparts that made acquisitions worth US$8 billion in India.
  • The infrastructure sector dominated Deal Street with transactions worth US$12 billion.
  • Power and oil & gas were top grossers with M&As worth US$5 billion. (ONGC subsidiary ONGC Videsh has acquired UK’s Imperial Energy for US$2.8 billion.)
  • Banking & financial services (the domestic HDFC Bank takeover of Centurion Bank of Punjab) and the pharma sectors (the acquisition of India’s largest pharma company Ranbaxy by Daiichi Sankyo of Japan) followed with M&A deal values of more than US$3 billion each.

While IndusView and Rangar see a fruitful shopping season, global deal tracking firm Zephyr is a shade circumspect about the India opportunity. The Asia-Pacific region witnessed a 50% decline in deal value in the July-September quarter (compared to the corresponding quarter of the previous year), says business daily Mint quoting the Zephyr report. “India was not a popular target for high-value deals.”

Another way of looking at it is to see the ones that got away. Delhi-based Bharti Airtel failed to bag MTN, a South Africa telecom company. Mumbai-based Reliance Communications also tried for the same target but couldn’t make headway. The Essar Group had to back off from the U.S.-based Esmark, which eventually went to Severstal of Russia. ONGC, too, has been eyeing energy assets abroad with mixed success.

Better Deals Later

Is this the right time to go shopping, when foreign assets are cheap? “This is precisely the reason why Indian companies are looking at deals now,” says Banerjee of L&T. Agrees Rajan of Bain: “It is absolutely the right time for Indian companies to be evaluating foreign acquisitions. For those companies that are looking to create a presence in specific geographies, gain market share where they already have a presence or acquire capabilities or technologies, this is as good a time as any to find receptive targets at attractive valuations.”

The view from the other side is that things could get better if you wait. “They (foreign assets) may get cheaper still,” says Chakrabarti of ISB. Adds Ramaswamy of KPMG: “Foreign assets are going cheap now, but I think it is best to hold on for some more time. Some of the companies (abroad) may go in for distress sale to save their skins. Getting bought or getting into a venture with an Indian company may be seen as a respectable exit because India with its growth story is holding out the promise of tomorrow.”

It’s not all that easy, of course. Indian companies too — as the Tatas and the Birlas have discovered — have their problems. “Money is an issue at present even for cash-rich companies,” says V. Balakrishnan, chief financial officer of Infosys. “In an environment where it is very difficult to value assets, one tends to be more circumspect.” Banerjee of L&T sounds a contrarian note, however. “Indian corporates still have a lot of cash in their balance sheets. Besides, they can still raise money at relatively cheaper rates from Western banks. There are plenty of options available.”

But is there anybody to lend? The credit squeeze and liquidity crisis have gripped India as much as the rest of the world. Says Chakrabarti of ISB: “It is impossible to raise fresh funds for almost anything. The Tata rights issue is a great example. [Besides] valuation of targets has become considerably more difficult in this environment.”

“In these volatile times, it is very, very important to understand the quality of the asset that you are buying,” says Rajan of Bain. “Many companies around the globe have taken advantage of robust overall growth. However, many of them might have weak strategic positions that will get exposed in this downturn. Indian companies need to make sure that, at this inflexion point, they are not buying companies that might have attractive valuations but significant potential downside.

“The cultural issues are also a part of the equation. Many of the target companies may have no familiarity with India or Indian management practices and there will be a natural fear of what it might mean to be acquired by an Indian company. These Indian acquirers are going to have to work doubly hard, both on the pre-merger phase as well as on the post-merger integration, to allay these concerns.”

The other problem, of course, is that the rupee has been falling rapidly. In January 2008, it had risen to about Rs39 to the dollar. Right now, it has backtracked to Rs50. “The falling rupee is making it harder to finance deals,” says Chakrabarti of ISB. “It is a bit like having great discounts at the end of the month. You want to buy but do not have the wherewithal.” Adds Rajan of Bain: “While valuations of targets have come down, so has the valuation of acquirers who might have been hoping to use the currency of their stock price to make acquisitions.”

India’s competitor in the neighborhood — China — has been a bit more active. Beijing’s sovereign wealth fund has made a series of investments in the U.S. finance sector such as Blackstone (US$3 billion), Morgan Stanley (US$5 billion) and, more recently, the troubled Reserve Primary Fund (US$5.4 billion).

“China’s approach is clearly more aggressive than ours, but they are also in a different place in the development curve,” says Chakrabarti. “It is perhaps best not to think in terms of competing with China.”

“Indian companies have been far more outward looking in terms of acquisitions than Chinese ones in the past few years,” says Rajan of Bain. “The Chinese will become increasingly aggressive going forward. But Indian companies are not starting anywhere behind. Indian firms must have an M&A strategy in place so that they can take advantage of opportunities once there is more stability.”

“Once the situation stabilizes and capital becomes easier to source, acquisitions should pick up,” says Balakrishnan of Infosys. “Indian corporates do want to globalize and there are a lot of assets available outside India which are quite meaningful for them.”

“I am overall very positive about the India story but with a very cautious approach,” says Ramaswamy of KPMG. “That is why I would rather we miss an opportunity than make a wrong move. Earlier funding was higher and the likelihood of failure was lower so one could take greater risks. Now it’s the other way. Every loss would put us back in terms of our capability to grow.”