 "Sunil Duggal")
Big-ticket mergers & acquisitions (M&A) may be newsy and glamorous, but do they reward shareholders? A study of Indian M&A since 2005 by Business Standard suggests that shareholders of acquiring companies have not benefited much from large deals.
Small is, in fact, big when it comes to shareholders' returns for acquirers. A study of 723 deals - domestic as well as outbound - since 2005 shows that small deals have been more beneficial to shareholders than big-ticket buys. The average deal size for the companies that delivered positive returns to shareholders after the acquisition is $160 million. This is against an average size of $283 million for deals that delivered negative returns from the time of the acquisition. (This analysis only includes deals where the acquirer has disclosed the transaction value.)
While there would be other reasons for the stock price of a company to rise, this study has evaluated M&A from the shareholders' standpoint: has she benefited after the acquisition in terms of returns since the acquisition? These returns are measured in terms of the movement in the share price of the acquiring company after the date of the deal announcement.
Dabur India, which has been pursuing an acquisition-driven growth strategy, bought three Balsara group companies in 2005 for for $27.4 mn. Since then, its stock has witnessed a 16-fold jump in price. Balsara is certainly not the only acquisition that contributed to Dabur's stellar performance in the last decade. It acquired Femcare Pharma for $41mn in 2008 to enter the skin care business; Turkish personal care firm Hobi Kozmetik Group for $69 million in 2010 to strengthen its presence in the Middle East and North Africa; followed by the acquisition of the US-based Namaste Laboratories for $100 million in the same year to enter the ethnic hair care products market in the US, Europe and Africa. Its other acquisitions in the last decade also include the 30 Plus brand from Ajanta Pharma in 2011, for which the deal value was not disclosed.
Dabur is not alone in its M&A success story in the fast moving consumer goods sector. Godrej Consumer and Marico have also made several small deals, buying brands or entering new markets, though in many of these cases the deal size is not available.
The share price of auto component maker Motherson Sumi Systems, led by Vivek Chaand Sehgal - the Business Standard CEO of the Year - has jumped 14 times since it acquired the world's largest automotive rear view mirror manufacturer, Viscorp, for $34.7 million in 2009. After the acquisition, the company emerged as one of the world's top vendors for car interiors systems, with marquee clients such as General Motors, Hyundai, Ford, Volkswagen, Renault and BMW. The deal also brought in manufacturing units spread across various countries, including the US, Mexico, UK, South Korea, China, France, Spain, Hungary and Australia.
Motherson also made a large acquisition in 2011, when it bought an 80 per cent stake in German auto component maker Peguform for $455 million. These two acquisitions broad-based the company's product profile to cover more vehicle parts. They now account for about 75 per cent of the company's revenues.
Motherson's main business is manufacturing wiring harnesses: the assembly of wires that transmit signals or electrical power in a vehicle. The company has made seven acquisitions so far, and these have helped it become a significant player, with about 40 auto parts units in 25 countries. But this study is not a surprise if we compare it with global trends.
"An analysis of the last 20 years of M&A activity and company performance for the 1,000 leading publicly listed companies globally suggests that companies which have high-volume thematic acquisition strategies have created more value for shareholders and will likely outperform their peer companies vis-a-vis those who only do big-bang acquisitions," says Barnik Chitran Maitra, partner, McKinsey & Company, and leader of the consulting firm's strategy and corporate finance practice in India.
Several of India Inc's small acquisitions have led to success stories. Software majors Tata Consultancy Services, Infosys, Wipro and HCL Technologies have made several acquisitions of medium and small companies to fill gaps in technology areas like SAP or in consulting, where they can move up the value chain. Pharma companies like Cipla, Dr Reddy's, Strides Shasun and Wockhardt have also made small acquisitions. Agrochemicals player UPL made small acquisitions abroad to enter new markets and new product lines.
Among the large business groups, the Tatas have made - besides larger acquisitions - several smaller acquisitions across companies such as Tata Chemicals, Tata Global Beverages, Tata Communications and Tata Steel. The Aditya Birla group made the large Novelis acquisition through Hindalco and the smaller Utkal Alumnia one. Besides that, Aditya Birla Nuvo has also acquired stakes in Minacs Worldwide and Future Retail, while Idea Cellular has acquired Spice Telecom. Mukesh Ambani, Anand Mahindra and the Godrej family have also been active on Deal Street.
While Dabur has given maximum shareholder returns, GTL Infrastructure - which acquired Aircel's tower business in 2010 - is the biggest value destroyer, with its share price down by 93.6 per cent since the deal was announced. The company is closely followed by Suzlon Energy, whose share price is down by over 90 per cent since its acquisition of Eve Holding for $525 million in 2006.
But is the deal size really an issue with companies that destroyed value for shareholders?
"Our study of more than 300 global deals over the past decade shows that in the long term, deal value creation or destruction is driven significantly by the quality of integration and not necessarily by the deal price. Only 20 per cent of deals in the study failed because the bidder overpaid, driven by an over-estimation of strategic fit or synergy benefits," says Barnik of McKinsey.
The biggest acquisition by an Indian company - Tata Steel's $12.7 billion acquisition of Anglo-Dutch steel maker Corus - has cost shareholders dear. Its stock is trading about 50 per cent lower than its level (Rs 455) when the deal was announced. Tata Steel has done only big-bang acquisitions; it also acquired Singapore's NatSteel for $285 million in 2004. But it is the Corus deal that impacted the company's performance the most.
It is also not that big ticket acquisitions have always failed. For another Tata group company - Tata Motors - the $2.3 billion acquisition of Jaguar Land Rover (JLR) in 2008 has given shareholders handsome returns, with its share price up by 170 per cent since the announcement.
"Any deal can go through an adverse cycle, especially in the commodity space. Usually, acquisitions that are smaller relative to the balance sheet of the buyer get absorbed in a cyclical downturn," says Ajay Arora, Head (M&A) for EY India, reflecting on the nature of acquisitions and why some fail while others succeed.
This pretty much explains why the value-destroyer list is replete with companies in the commodity business, such as Oil and Natural Gas Corporation, Hindalco, Vedanta and JSW Steel. "Also, typically, highly leveraged acquisitions are at relatively greater risk. Given some of the challenging experiences of the past, Indian companies have become cautious acquirers, especially with regards to outbound transactions," says Arora.
| String the pearls together |
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This is considered a safer strategy by many over big-bang leveraged buy-outs Software exporter Wipro has emerged as the most active strategic buyer for the last decade, with as many as 17 acquisitions. Business Standard studied 723 deals, with disclosed value, in the last decade to assess the most active companies. Since its $23-million acquisition of 3D Networks and Planet PSG's operations in some geographies in October 2006, Wipro's stock price has gone up by 83 per cent to Rs 545 a share on the Bombay Stock Exchange. Wipro is certainly not in the list of acquisitive companies providing maximum shareholder returns, but it is the most noticeable for the "string of pearls" strategy, which is often considered a relatively safer route to grow. It is a strategy that involves acquiring several small companies that fit the company's growth plans through building new capabilities and strengthening existing ones. This is against big-bang leveraged buy-outs, which instantly place a buyer at a different level on both sides of the balance sheet. Large deals are more common when money is cheap and easily available. Prior to the financial meltdown of 2008, many companies were tempted to make such big-bang acquisitions, but some stuck to their "string-of-pearls" strategy, which has served them well. The biggest acquisition that Wipro did in the last decade was the $600 million acquisition of the US-based Infocrossing in 2007. This led to the company management famously describing its strategy as the "string of pearls" one, in which "some of the pearls are small while others are big". Its other big acquisitions included the $150-million take-over of SAIC's oil & gas technology business in 2011, along with the $195-million buyout of Atco I-Tek in 2014. The smaller pearls in the string included NewLogic, Enabler, cMango, Promax Application and Opus CMC, all ranging between $20 million and $75 million. "High-volume deal makers are more successful in M&A, as they are better across several dimensions of M&A. Amongst them, high-volume strategies are tightly linked to company strategy, are proactive in following an off-market origination approach and are often driven by a robust process which scans hundreds of companies every year and includes business decision makers early into evaluating attractive targets, " says Barnik Chitran Maitra, partner, McKinsey & Company, and leader of its Strategy & Corporate Finance practice in India. "As a result, such deals are often easier to integrate into the company and the experiential learning of doing many integrations enables companies to have well-structured integration capabilities," he adds. The consulting firm cites integration challenges as the biggest hurdle to creating value from M&A across the world. Other Indian companies following this strategy include Piramal Enterprises (which made 10 acquisitions over the past decade), Cipla, Crompton Greaves, Infosys, Tata Consultancy Services and UPL. |
