Corporate group restructurings are altering India’s economic architecture and will ultimately benefit consumers as more companies get involved in cross-border mergers and acquisitions (M&As) than ever before.
Most segments of Indian industry have traditionally been quite fragmented, which has led to fragmented capacity as well. This will change as new business models evolve and companies consolidate to scale up operations and maximise long-term value of stakeholders, according to Ashok Chawla, chairman of the Competition Commission of India.
“The interplay of market forces calls for a broad regime to avoid adverse practices and improve businesses for consumer satisfaction,” he said. “We will encourage creation of entities across central and south Asia which can deliver faster and better goods and services.”
Sachin Pilot, the federal minister for corporate affairs, said emerging markets were compelling places to be in for international companies.
“M&A activity is likely to pick up worldwide in years to come due to higher growth and the desire of companies to invest cash hoarded during recession,” he said.
In the wake of uncertainties and risks due to the 2008 financial meltdown, companies worldwide began to strengthen their balance sheets and over the subsequent years have also acquired large cash piles.
There is a growing perception about widening gulf between India’s reality and its immense potential. Mr Pilot said there was a need to move beyond the comfort zone. “Industry leaders must gather confidence, and facilitate regulators and policymakers to ensure sustainable inclusive growth for the well-being of all stakeholders in the society.”
Kroll Advisory Solutions, a global leader in risk mitigation and response, says that as Indian companies grow restless operating within the domestic market, many are engaging in ambitious outbound M&A and making daring transactions across industries.
The outbound wave has seen a notable shift over the past 10 years, changing from deals centred on IT and pharmaceuticals to acquisitions in consumer goods and energy. These new deals have been driven largely by the need to satisfy India’s growing consumer class and meet the country’s growing need for oil and coal.
In 2012, Indian companies made 72 acquisitions abroad worth US$11 billion, a decline from 2007 highs of 125 deals worth $18 billion but an improvement over the deal value of $6.7 billion in 2011.
In terms of outbound target sectors, 2,012 Indian companies made major acquisitions into energy, mining and utilities worth $6 billion, accounting for 55% of deal activity for the year. Notable buys included ONGC Videsh’s purchase of an 8.4% stake in a major ConocoPhillips oilfield in Kazakhstan for $5 billion. It was the largest natural resource deal ever for an Indian business.
By geography, Indian companies have typically targeted Western jurisdictions. Taking advantage of attractive valuations in distressed markets, Indian companies are finding cheap buys in advanced markets. The preference toward developed markets is also due to a comfort factor with shared language allowing for a smoother deal-making process.
Since 2003, the United States and Britain have ranked as the top two investment destinations for Indian capital. A recent trend has seen India-based businesses investing in emerging markets, utilising best practices learned domestically to acquire assets in markets in central and Southeast Asia.
A first-hand familiarity with the deal process in emerging markets and various intricacies that can often block deals from reaching completion puts Indian businesses at a competitive advantage over their Western rivals. However, Indian corporations need to tread softly before committing resources to unfamiliar markets.
Reshmi Khurana, Kroll’s advisory solutions head for India, says understanding the risks — political, economic and labour-related — is crucial to successfully investing abroad.
“One of the risks in these investments is how national or regional political changes will affect the deal or the investment schedule,” she said. “Certain risks are out of an investor’s control, but identifying all stakeholders involved in the deal and considering various scenarios can help prepare for those risks.”
For Indian companies looking at the United States or Britain, they need to be aware of their responsibility under the Foreign Corrupt Practices Act and UK Bribery Act respectively. Targeted due diligence in advance can help mitigate an investor’s risk in these markets.
Ms Khurana also says Indian companies are beginning to understand the background, reputation and corporate governance standards of the target company. This is because differences in corporate cultures — especially corporate governance standards and internal control frameworks — can significantly affect the integration process later in the deal.
Industry experts say most M&As have been successful in elevating functional competence of companies. But on the flip side, this activity can lead to formation of monopolistic power.
Significantly, Phillipa McCrostie, global vice-chairperson at Ernst & Young’s transaction advisory services division, said during a recent visit to New Delhi that favourable demographics and growth opportunities meant India remained an attractive destination for M&A activities across diverse sectors.
“Catering to a growing, expanding and spending population is what every organisation wants to do. So there is a lot of interest from outside India to come inbound,” she said, adding the country was projected to be among the top five M&A destinations this year.
In 2012, the BRIC (Brazil, Russia, India and China) nations together accounted for about 15% of the $2.2-trillion global M&A market.