The news is unambiguous. High-profile overseas acquisitions done by Indian companies in the recent past have all turned around: Corus, Novelis and Jaguar-Land Rover. These purchases were made just before the financial meltdown that began with the collapse of Lehman Brothers in September 2008. The timing couldn’t have been worse. Commodity prices tanked, demand fell and money became dearer. The cash flow assumptions made at the time of the acquisitions went awry. For a moment, they all looked like a monumental disaster.
Two years later, all the acquisitions appear to be in good shape. Novelis, acquired by Hindalco in 2007 for $6 billion, is on its way to report earnings before interest, tax, depreciation and amortisation (Ebitda) of a billion dollars. Corus, bought by Tata Steel in 2007 for $12 billion and now called Tata Steel Europe, showed Ebitda of $513 million in the second half of 2009-10, as against a loss of $814 million in the first half. Jaguar-Land Rover, purchased by Tata Motors in 2008 for $2.3 billion, has been in profit for three consecutive quarters now.
Some bit of the turnaround can be explained by the rebound in the global economy, especially the BRIC countries. But that doesn’t take away the managerial excellence displayed by their Indian promoters. In some cases, one finds that the basic logic of the business has been turned around. Novelis, for instance, has moved its information technology operations from the United States to Pune in India. That alone has saved the company $40 million in annual expenses. The money has gone straight to the bottom line. A Novelis plant at Rogerstone in Britain will be shut and shipped to Hirakud in Orissa. The saving from moving operations to a low-cost production base could be substantial.
Or take the example of Jaguar-Land Rover. True, volumes have risen in key markets like North America, Europe, Russia and China, which has improved its pricing power. But this cannot take credit away from the new management; it has cut inventory by 50 per cent in the last one year, rationalised workforce, improved liquidity and exercised better cost-control. Tata Steel Europe has surely gained from the uptrend in the steel cycle; but the new owners have moved fast to secure it against any down-cycle. The company suffered from shortage of raw material (iron ore and coking coal), that gap has been plugged to some extent with acquisitions in Canada and Australia.
A full report card on the overseas acquisitions done during those days of easy liquidity is yet to be prepared. According to one estimate, Indians bought 422 companies abroad in 2007 and 2008 for $44.7 billion. So, it’s a huge exercise. And perhaps some more time is needed to see if all have added to the shareholders’ wealth. But early indications are positive. And it shows that Indians are good at managing acquisitions abroad. Management gurus will tell it’s a tough task — almost two-thirds of all acquisitions fail and, in the process, erode shareholders’ wealth.
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Most mergers and acquisitions in the West follow the “big bang” approach. The acquirer walks into the offices of the acquired company and takes charge from day one. This is not disruptive because the work culture in the West is more or less the same across countries. But when an emerging market entrepreneur acquires a company in the West, it becomes a different ball game because the work cultures are different. Indians have often found the fixed work hours in the West irksome. But the turnaround stories, which have now begun to come thick and fast, suggest that Indians have managed the cultural issues rather well.
What helps here is that Indians are used to cultural diversity at work. That is why companies in the West often prefer to be acquired by an Indian than a Chinese. A week before the bids for Novelis were to be opened, Kumarmangalam Birla had gone to the company’s headquarters at Atlanta. The employees had organised an Indian food festival in his honour. It was a subtle message that Birla quickly caught — they wanted him to take control of the company. Some years ago, when Gautam Thapar’s Crompton Greaves had done an acquisition in Belgium in 2005, the whole city had gathered to welcome him. In a ceremonial function, he was handed over the key to the city!
Also, Indians have desisted from posting Indians en masse to their overseas subsidiaries. To Novelis, for example, only five Indians were sent, that too at the mid-management level. And when the company’s President and COO Martha Finn Brooks left, Birla did not put an Indian on the hot seat. There were amongst the people he interviewed for the job a few Indians, but he chose Philip Martens from Ford. One could argue that Lakshmi Niwas Mittal grew his steel empire with talent from India. But that was when he was expanding in countries like Kazakhstan and Azerbaijan which didn’t have enough managers. In its new avatar as ArcelorMittal, its dependence on Indians has come down because there was sufficient in-house talent in Arcelor.
Of course, Indians know better than anybody else how to make do with less. The frugal engineering skills of Indians have often been hailed, but seldom has anybody appreciated their frugal managerial abilities. Shortages do have their advantages.