India’s Overseas Acquisition Spree: The flip side

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