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Last week's acquisition of Ranbaxy Laboratories by Sun Pharmaceutical Industries for a whopping $4 billion is an indication of India Inc's growing appetite to undertake big-ticket deals. In the past 10 years, it has completed about 250 acquisitions over $100 million, totalling $162 billion, with quite a few running into billions. In fact, some of the biggest deals by listed companies were also significantly large compared to their own market value at the time of acquisition.
The most important question, however, is whether the acquisitions have worked well or not for India Inc?
"Largely, yes, they have worked well for the acquirer," says Vibhav Kapoor, chief investment officer of IL&FS. The acquisitions have helped Indian companies diversify their risk from being focused on a single (Indian) economy to a much larger space, provided access to new products, technology and markets as well as significantly increased their scale and stature.
"If you look at the performance of the companies, except for a couple, they have done well, they are profitable. And this is despite many of them being done at the peak of the previous bull market," says Kapoor. Giving examples, he says Tata Motors' domestic business has gone into a cyclical downturn, but its size and market cap has done well because of the JLR acquisition. Similarly, for Hindalco, the profitability (at Ebitda level) has gone up because of Novelis during FY13 and FY14. Though Hindalco had seen pressure, it has come out of the global crisis very well.
Vikas Khemani, CEO, wholesale capital markets, Edelweiss Financial Services, though says, "It really depends on individual cases but if I have to draw a generality, those done in euphoric times have not done well and vice versa."
There are a lot of factors that, put together, determine whether the acquisition has worked well or not.
Khemani says that acquisitions in non-euphoric times are generally well thought out and at right price without any pressures. The acquisitions were done not out of external pressures but due to business reasons with due synergies in place. And, valuations have also been low during non-euphoric times. On the other hand, in euphoric times, the acquirers are generally greater risk takers and resort to high leverage. By paying a high valuation price and by taking leverage, the acquisition becomes risky.
The acquisition of Larsen & Toubro's cement business by Aditya Birla group was a good success story and so were the group's chemicals-related acquisitions. Tech Mahindra has also done well with Satyam's acquisition. These were done after a lot of thinking, risk mitigation, believes Khemani. But, Bharti's Zain Africa, Tata Steel's Corus were done during euphoric times.
Kapoor, too, says the key negative is the leverage, as the quantum of debt has gone up substantially for many companies. But, adds, "Indian companies were very small in terms of balance sheet. So, initially it was very difficult. Now they (many of them) have come out of it and have reduced debt. And over the next 3-4 years they will reduce debt further. Thereafter, we could see the next phase of expansion."
For an acquisition to work well, apart from ensuring that it makes good business sense in terms of synergies, culture, etc, most experts say that the company managements need to ensure that the pricing is right and, leverage and potential downsides are manageable. The latter is crucial considering the pain companies, especially commodity plays like Tata Steel and Hindalco, went through when the global crisis occurred. The operating environment in a specific country or region also plays an important role. Bharti Airtel's acquisition of Africa-based telecom business of Zain group is an example. "Bharti is finding it a bit difficult as they took debt and in Africa there are so many countries. Local conditions and currency have played spoilsport. It is now on a recovery path, but the recovery is slow and uneven and will take time," says Kapoor.
If you have done your risk management and not taken undue risk, then it is easier to digest the acquisition, says Khemani, citing the recent acquisition of Ranbaxy by Sun, which he believes should do well, as it is done with eyes wide open. Pessimism is already there in the price and there are a lot of synergies. Here, we look at six of the big-ticket acquisitions by India Inc and how they have fared.
