Nirmalya Kumar is professor of marketing and co-director of the Aditya Birla India Centre at the London Business School.
A specialist in marketing strategy and brands, Kumar has authored a book, India’s Global Powerhouses: How They are Taking on the World, (published by Harvard Business Press) along with Pradipta K Mohopatra and Suj Chandrasekhar. In India to promote the book, Kumar spoke to Bhupesh Bhandari on the overseas acquisitions done by Indian business houses.
The whole overseas acquisition trail has gone cold now that the stock markets are down and the wealth of Indian businessmen has vanished.
It is true that the wealth of Indian businessmen is down just like worldwide all companies’ wealth is down and the acquisition model based on easy liquidity is dead at the moment. But the fact of the matter remains that Indian companies are still going to acquire companies. Acquisitions will be done by companies with a strong balance sheet. A downturn is a good time to acquire companies because the valuations are cheap but you need to have cash in the bank.
Some of the high-profile overseas acquisitions are bleeding.
Acquisitions based on easy liquidity will be in trouble unless you can meet the interest payments through operating cash flows. In one or two cases, where they cannot do so, the companies will be in trouble. To be honest and fair to those companies, the operating cash flow assumptions they had made have declined dramatically.
Those assumptions are not valid anymore as industry volumes have dropped 20-25 per cent in many cases. So, they are now unable to meet the needs. Those companies that were not prudent in making the acquisitions will be in trouble. They will have to restructure.
Is there a way out for such companies?
There is a way out always. One way of restructuring is to focus on core activities and get cash from the non-core activities. Now, as the conditions have changed, we can’t rely on debt flows anymore. So we either raise money from the market, which is not very excited about giving money at this stage, or we have corporate bonds. The other option is to get out of activities that are non-core.
How many overseas acquisitions, and we have seen hundreds of them in the last few years, were done in haste or driven by ego?
Some percentage, I am sure. There is always an ego involved in any acquisition. Worldwide, two-thirds of the acquisitions fail to make money for the shareholders of the acquiring company. I don’t think it should be any different for Indian companies.
That’s the going rate. Because in India we haven’t seen so many acquisitions, we don’t know this history. All the data analysis done of acquisitions worldwide show this is so. Acquiring company shareholders lose, acquired company shareholders win, acquiring company management wins and acquired company management loses because they get fired.
In all these acquisitions, how successful have Indian businessmen been in turning these companies around and making money for their Indian shareholders?
Indian acquisitions are too recent to give the data on this. Worldwide, the answer is two-thirds don’t make money and one-third make money. I don’t think it should be any different for Indian acquisitions.
Do you think that some of these assets could be put on the block one more time, thanks to the liquidity crunch?
In the Hindalco case (its acquisition of Novellis for $6 billion last year), I don’t think that will happen because the debt has been restructured very successfully. In other cases, that might be. If you buy a dog, no matter how much you whip it, it will not become a horse.
So, if there are some fundamental problems with a company and it cannot be turned around, then ownership change will not help, unless the new owner brings a different logic to it. And a lot of the Indian logic should be, and which is the Chinese logic too, that these companies are making losses for two reasons: One, they are in a slow-growth environment, and two, their costs are too high. Because it a slow-growth environment, their revenues are not increasing, and because is a high-cost environment, there is no margin.
How do you change the logic? Indian and Chinese companies say, if we move a large part of the cost base from the developed country to a developing country, we will get the cost down and the margin goes up. And, because for a lot of these products, the future market is going to be India and China, and we are dominant in our home country, we can take these products on our existing distribution channel in our country and with our marketing muscle in the growth markets. So, we will turn what was a low growth, high cost company into a high growth, high margin company.
In how many cases has this fundamental logic been turned around?
It’s a bit early to say. Some companies are faster in doing it, others are slower. For example, Suzlon tried very quickly to change the cost structure (of REpower, which it had acquired in 2007). If you look at Novellis, there was an IT operation in the US. This has been taken out and set up as an independent company in Pune.
That has straight away saved $40 million. I think all Indian acquiring companies have this as a goal but they are going tentatively. This is because if you suddenly try to dramatically change the logic, you get a lot of resistance and flak from the acquired company and its various stakeholders and constituents. So, you change the logic slowly. You don’t make pain, you don’t make a thousand people redundant overnight. Indian companies are anyway not like western companies. In our system, redundancies are not so easy to do.
How successful have Indian acquirers been in getting the cultural integration right?
That is definitely an issue. There are two models of integration. One is called big bang. Here, you say I am on the first day going to integrate everything and then I am going to get all the redundancies, all the cost savings within the first three to six months.
Most developed country companies when they acquire other developed country companies, this is how it happens. It is very quick integration because cultural issues are minor. When you are doing cross-border acquisitions, you will almost leave it like a subsidiary so that you don’t even try to integrate. It is as if you are the holding company. And then slowly over time you will pull the company in.
Because if you try to do the big bang integration, you will get so much cultural conflict that everybody’s eye will go off the operating performance to “Will my job be safe, what is the new process, are these Indians taking over?” So, it’s a very bad idea in cross-cultural integration to do the big bang approach. Much better to say, I will send four people to the company, see if they are of any use. If you send the right people, then the company you have acquired will say these four people you sent were very good, do you have any more?
The issue is, do Indian companies have the people to manage global companies? People are not willing to take the assignment, even if you have them. We don’t have people to send out in hordes to take over the assignments in other countries.
But the cultural integration problem remains. Not many Indian companies have proven that they have the ability to put a non-Indian on top. Companies like Nestle, Unilever and Citibank have dealt with this problem for a long time. So all the nationalities working there feel they have a chance to get to the top.
In Indian companies, we don’t have such a process built in because our globalisation is so new and we haven’t thought about it. And that’s going to take some time to learn. It is not going to happen overnight. It is not going to happen in the next two or three years. And this is a big challenge.
What is the anxiety that you saw in the employees of companies that were acquired by Indians?
In the beginning, it is high. But three months later when I talk to them, the anxiety levels are down. In fact, the biggest thing they say is, we thought a lot of Indians would come and nobody has come.
The only company in which we saw a lot of Indians being sent to the acquired company was Mittal Steel. And that was because they were taking over companies mostly, in the beginning, in places like Azerbaijan and Mexico where there wasn’t any real talent available. But when the Arcelor deal was done, we didn’t see too many Indians going there. Most of the other companies too didn’t send too many Indians.
The have been few brand-led overseas acquisitions by Indians. Do Indians lack the expertise to manage brands?
There have been some such acquisitions — small ones like those done by VIP, Godrej and Marico. If you buy a big brand it is going to cost billions of dollars. To manage a global brand means that either you build it, which can take 20 or 30 years like Toyota, Samsung and LG, or you buy the brand, which will be very expensive. There is no short cut.
