This was written as early as in 2006... but it might be more relevant today, particularly, in the light of our current anxiety about the widening CAD and hence the posting.....
'Can-do' attitude has become all
pervading, under which, the embedded losses are getting glossed over.
It’s amazing!
It’s very, very amazing: “Tata
Steel makes Corus offer” to acquire its steel plant(s) at a whopping
(indicative) valuation of anywhere above $ 8 bn. And, if the deal comes
through, it would be five times bigger than the biggest overseas acquisition to
date, executed by Oil & Natural Gas Corporation.
What a transformation! Till yesterday India
Inc. was quite content to stay at home—in a market which is pretty insulated
from foreign competition—and make money.
Surprisingly, it has today embarked on an acquisition spree of overseas
businesses.
The pioneer champion of this
overseas acquisition marathon is none other than Ratan Tata, the unassuming
Chairman of Tata Group of Companies. It is Ratan Tata who is the first to
foresee the immense potential in acquiring overseas firms to boost growth.
Their saga of acquiring overseas corporates started way back in 2000 when Tata
Tea acquired Tetley, UK for $407 mn. This was followed by the acquisition of
Daewoo, commercial vehicle company of South Korea, by Tata Motors for $102 mn
in 2004; Natsteel of Singapore by Tata Steel for $286 mn in 2004; Teleglobe
International Holdings by VSNL for $239 mn in 2005; Financial Network Services
of Sydney by TCS for $26 mn in 2005; Brunner Mond Group Limited of UK for $120
mn by Tata Chemicals in 2006; 8 O’clock Coffee of US for $220 mn by Tata Coffee
in 2006; 30% stake in Glaceau of US for
$677 mn by Tata Tea and Tata Sons and now it is the turn of Corus—the Anglo-Dutch steel maker.
Joining Tatas in this spree are
Dr. Reddy’s Laboratories—a generic drug maker from Hyderabad who acquired its
German rival Betapharm for $572 mn; Ranbaxy acquiring Terapia for 324 million;
Suzlon Energy—makers of wind turbines—acquiring Belgium’s Eve holdings for $548
mn; Videocon acquiring South Korea’s Daewoo Electronics for $700 mn in
association with the US Ripple Wood; Wipro Technologies acquiring IT companies
in Finland, Portugal and the US etc.
It’s incredible! A couple of years
back it was multinationals who were
seeking advice from the global investment bankers for strategy to enter
Indian market, while today it is the turn of Indian companies to seek advice
from these very investment bankers to go global. Of course, the reasons for
this sudden development are not far-off to seek: one, the competitive ability
of Indian companies has in the recent past gone up tremendously; two, the low
interest rates prevailing in the Indian banking system for the last three to
four years; three, willingness of domestic banks to fund large ticket
leveraged-bought-outs; and four, hassle-free access to the cheap international
finance are all cumulatively fueling the acquisition spree. The net result is:
a record 112 foreign acquisitions whose value is estimated to be around $7.2
bn. Further, market pundits predict that if the current trend of booming
domestic economy continues into future, India is all set to go for even larger
overseas deals, particularly in pharmaceutical and automotive sectors.
What does all this mean? On the
positive side, it boosts the market share of Indian businesses, which means,
more profits to the stakeholders of these companies. Of course, it would also
generate additional revenue in terms of tax collection for the government. Over
and above all this, it generates a terrific quantum of “feel-good” attitude
across the country giving a further fillip to the economic growth.
But, there is also a flip side to
it. It is commonsensical that money should flow from the rich to the poor but
not vice-versa. Ironically, on the one hand, money is flowing from India—a
developing country—to outside that, too, for acquiring manufacturing assets in
Western Countries, while on the other,
we are making all-out efforts to woo FDI inflows into the country to
acquire new technologies, generate more employment, more exports and, thereby,
sustain growth rate. It is a different matter, if such overseas investments are
meant for acquisition of oil fields or mining rights, for they add value to
Indian manufacturing.
It is commonsensical that owing to the ongoing
overseas acquisitions spree that involved a staggering investment of about Rs.
35,000 cr in the first three quarters of the current year, we have lost the
opportunity of creating additional employment to that extent in the country. It
is a different matter that at the micro level, it will not make any difference
to the respective corporates, for their profit levels remain north-bound. But
for the country at the macro level, it is a terrific loss in terms of
opportunity foregone for creating additional employment. Here, it is also
necessary to bare in mind that the increased growth rate we have been
witnessing for the last three years which has raised so much euphoria has
indeed not resulted in the growth in employment. In fact, the recent growth
rate in employment is less than what was enjoyed during nehruvian economy.
That is where the argument of one
School of Economists—that free flow of capital sans free movement of labor
across the borders is not desirable—sounds palpable.
Courtesy: The Analyst, November, 2006
Courtesy: The Analyst, November, 2006
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