The global game

Disco aficionados may remember the Pet Shop Boys' Go West as just another number that they gyrated to in the early '90s.

In recent times, the song seemed to be making a comeback of sorts, with Indian corporates aspiring to go west to expand their businesses.

A random inspection of news articles appeared in the last few months reveals a number of global acquisitions made by domestic companies of varying magnitude - whether it's Reliance's acquisition of Flag Telecom, which was the largest ever acquisition in the services sector by an Indian company and first by Reliance abroad or Subex's rather minuscule acquisition of Alcatel's telecom fraud division.

Last week, India's second-largest steel maker Tata Steel joined the gang of companies going global by acquiring NatSteel of Singapore (see story on page 3). Tata Steel's stock gained smartly after the announcement on hopes that the company would enter a new growth trajectory post-acquisition.

Tata Steel is not the first case where stock markets have extended a hearty welcome to a global acquisition. Almost, every foreign acquisition results in exuberance in stock prices - at least temporarily.

The fact, however, is that while global expansions and inorganic growth strategy can catapult companies to a different scale in a short while, they may not always work out that way. There are several risks.

Experts say while global expansions may have become a business imperative in many industries, they may not be construed as a sure shot way to sustainable growth. Stock investors need to be discerning.

A case for going global
When the reform process began in 1991, tongues wagged that it would imply the takeover of Indian companies by foreign MNCs. However, very few at that time believed that the reverse would also hold true.

The 'power of India story', as Merrill Lynch calls it, is becoming evident, supported by changing demographics, the estimated doubling of consumption spend to $500 billion and enhanced outsourcing - both in manufacturing and services.

In a recent report, the investment and research house said India is missing a piece of the pie in international markets such as Europe and US due to the absence of distribution networks. On the other hand, MNCs operating in those countries are increasingly using India as a sourcing base.

The visible change, they say, is that Indian companies want a share of the global pie and therefore expect a spate of overseas acquisitions in the years to come.

Merrill Lynch cites Indian companies attaining reasonable marketshare in the domestic market, successful export companies looking at capitalising on the domestic demand in other markets and companies wanting to capitalise on skills or technologies that are not available in India as the factors contributing to the change.

Add to this the erosion in the values of international companies due to an ongoing global recession and the fact that margins in many of the overseas markets would be higher compared to that in India, and the overseas investment case looks enticing.

Merrill Lynch expects the share of Indian exports in world trade to double from the current 0.5 per cent to over 1 per cent apart from resulting in greater flow of foreign direct investment (FDI) and cushioning these companies from any demand recession within India in the future. As a side benefit, it expects incremental earning flows to result in higher multiples for these companies.

Another proponent of the India story has been Ernst & Young, which said in its recent global pharma report: "A spate of well-timed strategic overseas acquisitions in 2003 such as Ranbaxy's acquisition of RPG Aventis' French business, Wockhardt's acquisition of CP Pharmaceuticals, UK, and Zydus Cadila's acquisition of Alpharma, France, have catapulted these companies into the global league."

Another reason is the limited size of the market in certain industries. A classic case is software services. Analysts say, in IT services, the addressable market outside India is significantly larger than that in the country.

However, a leading domestic tech player like Wipro is very much focused in India in its IT services business. "Our IT business is focused on the domestic market before addressing the global market," says KR Lakshminarayana, head of treasury and investor relations, Wipro.

S Gopalakrishnan, chief operating officer and deputy managing director of Infosys, echoes the same sentiment: "We look at acquisitions that can complement our business as well as enhance our client facing capabilities in various geographies. The synergy of combined entities spurs growth much faster than a single entity."

The synergy has perhaps been seamlessly adopted by Asian Paints, which has operations in 23 countries and is a leader in 10 overseas markets, driven mainly by acquisitions. "We have decided to get into the emerging markets which are similar in some ways across the globe," says Jalaj Dani, vice-president (international operations), Asian Paints.

"We have also selected markets where there are not many competitors. That allows us to be among the top three players in those markets over a period of time," he adds.

Dani says the retail part of the business (distribution) is quite fragmented in emerging markets and resembles that in India where the company has over 15000 retailers. This, in turn, gives the company a good spread as far as retailing across these markets is concerned, he adds.

It is not just acquisitions that are the rage. Global operations as a term, far from standing only for plain exports, has been expanded to assembly and manufacture in foreign shores. Mahindra & Mahindra's US arm is producing 10,000 tractors annually. The company is planning similar forays in Indonesia, China, Russia and South Africa.

Cement major Gujarat Ambuja is also looking to explore opportunities to set up operations in the Middle East and the European region by either setting up manufacturing facilities or buying out some existing units.

This move would make it the first domestic cement company to have a base outside India. Indian companies are spending more and more towards marketing, production and research and development abroad. 
 

Some notable overseas acquisitions in the past one year
Company	Acquisition details
Reliance Industries	Flag Telecom (Oct 2003): 100 per cent equity was acquired for $211 million. Flag is a global submarine cable network with a capacity of around 5000 gbps and a network length of 50,000 km. Access to 55 countries and high bandwidth will help Reliance realise its global ambitions
Infosys	Expert Information Services, Australia (Dec 2003): 100 per cent stake was acquired for $23 million. The acquisition will give Infosys access to the Australian market
Tata Motors	Daewoo Commercial Vehicles (Mar 2004): Acquisition ($118 million) gives Tata Motors a foothold in the lucrative South Korean market besides facilitating its entry into China and other SE Asian markets
Bharat Forge	Forging business of CDP, Germany (Jan 2004): Acquisition of CDP (Euro 28 million) has made Bharat Forge the second-largest forging company in the world
Dabur	British cosmetics firm, Redrock Ltd (Sept 2003): Acquisition amount was $5 million. Redrock is a franchisee of Dabur in the Middle East. It entered into a licensing pact with Dabur India in 1991 and has since been producing and marketing Dabur brands
Hindalco	Copper mines, Australia (Mar 2004): Two copper mines were bought for $72 million
Ranbaxy	Aventis' generic unit in France (Dec 2003): Acquisition price was $75 million. Though the French generic market is currently small, it is likely to witness significant growth over the next decade
Sundaram Fasteners	Precision forging unit of Dana Spicer (UK) (Dec 2003): The unit was acquired for GBP 1.5 million
Amtek Auto	Smith Jones Inc (Jan 2003): Smith Jones was acquired for $20 million. The GWK group, with subsidiaries King Automotive Systems and Geo W King, manufactures auto components and has a turnover of over $200 million.

Challenges
Going global is not without its share of problems. Though most companies say India is right up there with the best of the world when it comes to global competitiveness in services, Lakshminarayana of Wipro says the India brand needs to spruce up: "The main hurdle is one of brand - the brand value of Indian companies could be significantly improved."

In the more punctilious arena of pharma, there are a lot of avenues that need to be examined with a fine comb when it comes to compliance.

For instance, if an MNC wants to sell a particular product in the US market, as per USFDA guidelines, it is not only the final product that has to be manufactured in a USFDA-approved facility, but the intermediates. The MNC has to make sure that its supplier also has the requisite approvals.

"The pharma MNC may be sourcing products worth just a few crore from its Indian suppliers, which may be insignificant given the size of its global operations. However, it is this couple of crore worth of products which go into global pharma products worth billions of dollars," says Gaurang Mehta, an industry watcher. The entire process for approvals may take around three-four years.

Besides, environmental issues like pollution, water and air quality and child labour would also come under the scanner.

Finally, the allure to acquisitions would not just be companies available at attractive valuations that complement Indian corporates' existing strengths, but also the transfer of certain costs of the acquired brand and distribution network to India.

According to experts, three parameters are important to get the global formula right: one should have a well-acknowledged brand, mastery of the global demand model along with cheaper but quality offerings.

Varsha Valecha of Enam Financial Consultatnts sums it up, "Companies, regardless of sectors, should have strong business models, which would translate into financials, come up with solutions which are tailor-made for investors and, more importantly, maintain relations with them. These would bring about sustainable growth to these companies."

Companies going global can be hugely successful. But it requires a higher level of management bandwidth to make a success out of global operations. Whether it is about managing people and cultural differences or playing as per the rules of the land, it may not be easy.

Stock markets, however, tend to be exuberant about companies making global acquisitions. Investors should follow a wait and watch policy before acquiring such stocks, since prices of such stocks often have high expectations built in them.

WHY GO GLOBAL

• India is missing a piece of the pie in international markets such as Europe and US owing to the absence of distribution networks
• Lots of Indian companies have attained reasonable marketshares in the domestic markets and global exposure is a mantra for incremental growth
• Successful export companies can look to capitalise on domestic demand in other markets
• Companies could capitalise on skills or technologies that are not available in India

Where the action is

The acquisitions are not restricted to a particular sector. Although the IT and pharma sector - the poster boys of India's global competitiveness - had been more prolific in terms of acquisitions until a few years ago, companies belonging to other sectors have also made significant progress in the last one year to establish themselves overseas. Following are a few sectors where the global story is more pronounced:

INFOTECH: The concept of globalisation has been accepted more widely in the IT space than any other sector. "In fact, IT services was an idea that was first made it big overseas and then gained acceptability in the domestic market," says Valecha.

She says a lot of big companies are bagging high-end projects and are moving up the value chain by way of quality service offerings and dealing with the increasing customer complexities.

"In the next five years, IT companies would have to walk a tightrope, balancing customer acquisitions and quality control, moving up the value chain via higher level of services along with branding and pricing power," Valecha adds.

As Indian IT companies already have reliable assembly lines and delivery engines, acquisitions would be driven by access to customers going forward.

PHARMA: The pharma industry tells a two-part story. On the one hand, smaller pharma companies have been forming alliances to attract MNC drug majors to partner with them; on the other hand, there are domestic firms going great guns as far as acquisitions abroad are concerned.

"The paradigm shift in the Indian pharma industry started from mid-nineties onwards when companies began preparing the kind of business models that they needed to adopt for complying with the patent regime from 2005 onwards" says industry watcher Gaurang Mehta.

Big companies like Dr Reddys and Ranbaxy are setting up front ends in the US to directly compete with foreign companies but a lot of Indian companies cannot do that because they do not have the size advantage that these bellwethers have.

Ranbaxy's strategy for becoming a global player involves establishing its presence in the key pharma markets like USA, Europe and BRIC (Brazil, Russia, India and China) countries.

"The domestic market is witnessing intense competition and will see a shake-out post-2005," says a spokesperson from Ranbaxy. The company expects the re-emergence of MNCs and lots of co-marketing tie-ups and hopes to become one of the top five global generics players by 2012.

"For Ranbaxy, India will be a focus market even as global expansions take place since companies need to have a strong home-base in order to expand on a global scale," he adds. Smaller firms, on the other hand, are getting into contract manufacturing and research which will help the global pharma industry reduce costs and hasten development of products.

AUTOMOBILES: The latest development in the auto space has been the news of Tata Motors signing a pact for a joint venue in China to manufacture and sell its cars.

Mahindra and Ashok Leyland have also been very active in the global space. Industry watchers say these companies seem to be concentrating in the South East Asian markets. For example, the Tata-Daewoo tie-up will help Tata Motors get a significant foothold in East Asian markets.

"As far as acquisitions are concerned, there are not many easy targets. Although Indian companies are showing an inclination to grow through the acquisition route, how the future will play out is not very clear," says Gautam Jain, an industry watcher.

However, analysts say many leading Indian companies have the balance-sheet strength to take opportunities (acquisitions) when they arise. "I expect companies like Tata Motors, Bajaj Auto and TVS Motors to become leading players in the global industry around 10 years down the line," says an analyst.

He says these companies have been going up on the performance curve and also have the management capability for ensuring such growth. However, analysts feel that the auto ancillary segment has more potential for acquisitions than the auto sector. Companies like Bharat Forge and Motherson Sumi are expected to do well in the future.