Mergers and acqusitions

Heres an intersting take on Mergers and acquisitions done by India Inc.

(Source : The hindu 06 Jan06)

Newspapers are abuzz with speculation. India is emerging a vibrant player in the world of mergers and acquisitions (M&A). Not long ago, Mr Lakshmi Mittal acquired Arcelor, and had Tata Steel's bid for the Corus group of the UK gone through, it would have made the company the world's fifth largest producer. Tata Group companies and many in the information technology, pharmaceutical and banking sectors have made a host of other acquisitions. Could anybody have imagined such a showing by Indian entrepreneurs even a few years ago?

"Apart from the financial part,I think it reflects a change of mindset of our people.The Cosmopolitan culture celebrating India has truly arrived."


In many areas, India is emerging at the top. A leader in Information Technology, India was designated the third most attractive research and development centre in the world by Unctad (United Nations Conference on Trade and Development) in its World Investment Report (WIR), 2005. India is also the biggest foreign investor in the UK, outpacing even the US.
There has been a spurt in overseas investments by India.

From $0.7 billion in 2000-01, the overseas investments increased to $2.7 billion in 2005-06 and would have soared to $11 billion in 2006-07 had the Tata's Corus buy gone through; that is, it would be almost double the inbound foreign direct investments, estimated at around $5.5 billion for 2006-07. The industries that attracted Indian investments included metal, energy, pharmaceutical, IT and banking. But why M&As?
Six reasons, according to the former Ranbaxy CEO, Mr D. S. Brar, drive M&As:

Accessing new markets, maintaining growth momentum, acquiring visibility and international brands, buying cutting-edge technology rather than importing it, developing new product mixes, improving operating margins and efficiencies, and taking on the global competition. Unctad's WIR 2006 pointed out four factors that drive developing nations to go global. First, it helps market penetration. Indian multinational corporations looking for niche markets — such as IT services and pharmaceutical products — gained substantially through outbound investments.

Second, rising labour costs at home push MNCs abroad. Third, competitive pressures in the domestic economy force MNCs to invest abroad. Fourth, home government policy liberalisations stimulate outbound investments; indeed, since 2003, New Delhi has taken steps to liberalise overseas investments.

According to Unctad's WIR 2006, developing and transition economies have emerged significant outward investors, as this has become an important tool for development of the domestic economy.

`Emerging' investors


In 1990, only six developing and transition countries had made any outward investment. In 2005, the number had increased to 25. Between 1987 and 2005, the share of global M&As by MNCs from developing and transition countries rose from 4 per cent to 13 per cent in value terms, and their share in greenfield and expansion projects exceeded 15 per cent in 2005.

This buoyancy of overseas investment by the developing and transition countries is mainly because of India and China that are emerging the significant players. Happily they are not in competition as in the case of inbound foreign direct investments. Their objectives of and destinations for overseas investment are different.

Comparisons with China


Though China has also stepped up its overseas investments they are of little consequence vis-à-vis the FDI inflows into the country, which touched $60 billion. China's direct investments overseas were $6.92 billion in 2005, up 25.8 per cent over the previous year. Also, while Indian investments are northwards, Chinese investment are south-south. In 2005-06 and 2006-07, over 80 per cent of Indian investment abroad was made in the US and the UK. As much as 60 per cent of China's overseas investments flowed into Asian countries.

Though India's public sector took the lead in investing abroad, especially looking for oil assets, the private sector is now going full speed ahead, driving overseas investments. In China, state enterprises and the public sector have been the principal investors. In 2004, 80 per cent of China's outbound investments was made by state and public sector-owned enterprises. However, a major share of China's private overseas investment is tied with "round tripping" funds (estimated at 15-20 per cent), flowing from tax havens such as Hong Kong, the Cayman Islands and the Virgin Islands — the three largest destinations for outward investments.

From this perspective, India's outbound investment is more accountable in global FDI outflow than China's. India's primary motive is to increase market penetration while China's aim is to bolster its domestic industries.


Eyebrows have been raised over the rapid growth in India's investments abroad, but that should be no reason to curb them as the benefits they bring to domestic industry are many and significant.

The most important benefit that the developing and transition economies derive from outward investments is increased competitiveness. This strengthens the arms of local companies and of the MNCs to survive in a competitive milieu. Therefore, the more the domestic industries invest abroad, the more the benefits to the home economy.

(The author is Adviser, Japan External Trade Organisation (JETRO). The views are personal.)