Indian conglomerates on global M&A hunt

According to latest surveys, global M&A activity should increase $2.2 trillion in 2010 and over $3 trillion in 2011, which would be the highest level of activity since 2007. In my opinion, about half of this volume will either be initiated by a national champion from an emerging economy or executed in an developing market such as India, Russia, Columbia, South Africa, Turkey, Vietnam, Indonesia, and Egypt. 

For example,  a great case in point are Indian companies who are hungry for overseas assets and have launched an armada of overseas mergers and acquisitions in the past few months according to a latest article by Financial Times.

Sahara India Pariwar’s £470m purchase of the Grosvenor House hotel in central London last week was one of the highest profile international acquisitions by an Indian company since the Tata Group snapped up Land Rover and Jaguar, the British car marques, two years ago.

The conglomerate, owned by billionaire Subrata Roy, had made no secret of its desire to purchase overseas assets and, over the past six months, it expressed interest in Metro-Goldwyn-Mayer, the Hollywood studio, and Liverpool Football Club.

A month before, Venkateshwara Hatcheries, a poultry company, bought Blackburn Rovers, another English premiership club. And in the middle of last year, Reliance Industries, owned by Mukesh Ambani and India’s largest conglomerate, began what is likely to be a sustained buying spree of shale gas assets to build its business in the US.

Last year, cross border M&A recorded a strong revival; deals in and out of India were five times the total value of those of the previous year.

More outbound acquisitions were made last year than inbound ones to the world’s fastest growing large economy after China. Overall M&A activity was estimated at about $45bn by auditors Grant Thornton, the auditing group, for the first 11 months of the year.

Sahara’s deal is at the larger end of a fleet of smaller deals that characteristically expand in stealthy steps Indian ownership in regions such as Africa, the Middle East and eastern Europe. Many of the deals were worth below $100m and attracted little attention.

“When investing in the west, Indian companies have tended to look to the UK but increasingly more European markets will become the focus,” says Robin Johnson, a partner at Eversheds, the London-based law firm, of the fast-widening ambitions of Indian companies.

“Up until recently an acquisition by a Chinese or Indian company in Europe assumed a transfer of technology or assets back to Asia. This is no longer the case. They want access to European domestic and business consumers and hard currency through permanent investments.”

Outward investment has totalled as much as $80bn over the past decade, with the most favoured destinations including the UK and US. A study by the University of Maryland found that there were 372 acquisitions by Indian companies in the US between 2004 and 2009 worth $21bn.

Reserve Bank of India estimates that investments by domestic companies in overseas joint ventures and wholly owned subsidiaries totalled $10.3bn during 2009-10, a period characterised by global economic gloom.

“Indian companies are now more experienced in dealing with overseas M&A transactions and are considered serious contenders for acquiring global businesses,” says Mahad Narayanamoni, a partner in the corporate finance division of Grant Thornton.

“Acquiring global brands, gaining access to overseas markets and leveraging new technologies for Indian markets are some of the key drivers for outbound acquisition.”

At the same time, India is one of the most promising destinations for foreign direct investment. In the first 10 months of 2010, India attracted $78bn in foreign direct investment. This is well below what many analysts believe Asia’s third-largest economy can achieve if it freed uprestrictions on FDI and pared down its often-stifling bureaucracy.

Yet, the level of investment in the first 10 months of 2010 was almost double what the country attracted during the same period in 2009, $42bn. As foreign capital flows into India, Indian capital is seeking routes out.

RBI data show that Singapore, Mauritius, the Netherlands, the US and the British Virgin Islands accounted for 67 per cent of total outward FDI from India last year. This reflects the crucial role these financial services centres play in channelling Indian capital flows. But RBI data does not capture the extraordinary spread and geographical ambition of Indian acquisitions.

In past weeks, Elecon Engineering has bought the UK’s Benzlers-Radicon group for $35m,Biocon has invested $160m in a manufacturing facility in Malaysia, and Aegis, owned by Essar Group, has bought Actionline, the largest business processing group in Argentina to give it Spanish-speaking capability.

Likewise, Mumbai-based Twilight Litaka Pharma has picked up 26 per cent in South Africa’s Intepro Healthcare, auto component maker Ashok Mindra Group has bought a moulding manufacturer in Germany, Aksys Koengen, and Tata Chemicals has bought British Salt for close to $100m.

Patni Computer Systems is expanding in China’s Yangtze region, while Fortis Healthcare is tying up with hospitals in Tanzania and in Dubai.

In spite of the rising deal flow, Indian business leaders are divided about the returns on overseas expansion. One head of a Mumbai private equity group, perplexed by the outward investment, said there were few markets offering better returns for Indian business than a home economy growing at 8.5 per cent.

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