NEW DELHI (April 22) - Godrej Consumer recently acquired the Indonesian household insecticide maker Megasari Makmur Group for INR 12 billion to strengthen presence in Asia, Africa and the Latin America. The announcement comes close to the heels of Bharti Airtel Ltd.’s cash and stock buy of African operations of Zain Africa BV for INR 493.56 billion.

India’s total announced deal value for Q1CY2010 surged to USD 19,198 million compared with USD 5,195 million a year ago (Source: VCCEdge). According to analysts India will see an increase in the M&A activity in CY10 with the return of investor confidence and liquidity. The analysts believe that companies will take advantage of lower valuations to make strategic investments thereby strengthening their position across various sectors.

For the quarter, Telecommunication Services sector recorded deals worth USD 14,036 million followed by Energy at USD 1,172 million and Healthcare at USD 961 million.

What is driving India’s big-ticket global acquisitions?

There has been a voracious appetite for acquisitions in India for a very long time since there are limitations to growing organically. The companies are looking at means to achieve operating synergies and thereby survive in the competitive environment. In addition, overseas acquisitions help companies overcome market limitation through cross-border expansion.

For instance, Indian FMCG companies are looking for acquisitions in the emerging markets like Africa, Middle East, even countries like Brazil and Latin America as well as China where the valuations are cheaper. The strategy is to acquire small/ niche players with a known brand in these emerging markets and with the help of the brand channelize their products into those markets.

One of the key reasons for looking outside for acquisitions is also that there are limitations to growing organically and expensive valuations make domestic acquisitions difficult.

Big deals of Q1CY10

• Bharti Airtel Ltd. agreed to acquire the African operations of Zain Africa BV for USD 10.7 billion (INR 493.56 billion).

• GTL Infrastructure Ltd. acquired tower assets of Aircel Ltd. for USD 1.8 billion (INR 84 billion).

• Fortis Healthcare Ltd. acquired a 23.9% stake in Singapore-based Parkway Holdings Ltd. from TPG Capital for about USD 685.3 million (INR 31.10 billion).

• Essar Group agreed buy Trinity Coal Corp. for about USD 600 million (INR 27.47 billion) from Denham Capital Management LP.

Telenor ASA acquired a 7.15% stake in Unitech Wireless Ltd. for USD 433.36 million (INR 20.22 billion). (They have named their mobile services in India Uninor.)

Sectors to watch for M&A activity

For 2010 analysts expect massive M&A activity in Banking, Telecom and IT sectors. There have been several new entrants into the telecom sector in the recent time. For many of these companies, telecom business is not a core operation. Hence, a few of these companies are likely to sell off to bigger players following the acquisition of bandwidth. Additionally, sector consolidation eventually will be inevitable with a large number of players. The Banking sector as well is expected to witness consolidation going ahead.

Companies in oil and gas and metal sectors have grown too big and the only way to grow is via the inorganic route, and hence the hunger for acquisitions. RIL’s recent USD 14.5 billion offer to buy LyondellBasell Industries is a case in point.

Liable risks to acquisitions

Even though optimism is at a high merger and acquisition is risky activity. A large number of uncertainties accompany an M&A deal in all the phases including preparation, operational, integration and post-integration. These uncertainties could lead to a huge financial risk. Hence the companies need to be careful to ensure that the acquisition is the best possible fit for them as well as it does not overstretch their plans so that they don’t end up with too much to handle later.

According to Standard & Poor's Ratings Services, Bharti’s acquisition of Zain, though expected to provide the company meaningful growth opportunities in Africa, will face limited integration risk as the two companies have almost no overlapping operations. The rating agency placed its 'BBB-' long-term corporate credit rating on Bharti on CreditWatch with negative implications saying it reflects S&P’s view that the acquisition could significantly increase Bharti's debt and weaken its business risk profile.

Tata’s USD 2.3 billion buy of the UK-based luxury car brands Jaguar and Land Rover from the car giant Ford is another good example. Even though Jaguar has shown signs of recovery now, Tata had admitted to have overstretched itself in paying USD 2.3 billion for the deal just as a recession loomed. The company reportedly admitted that the acquisition was made at an inopportune time, when the prices were peaked.

Conclusion

Indian companies today are in league with the traditional multinationals from Europe, US, and Japan. The overseas acquisitions by Indian companies indicate that they are prepared to compete globally. For most Indian companies, the world is truly their playground now. It only needs to be seen how these companies manage to effectively compete with the other players out there, without running the risk of overworking, and consequently injuring themselves, in the process. The game has to be played but in a way as to come out with elephantine returns, not white elephants.