Big deal?

Not really. The billion-dollar tags on recent buys by India Inc only underline the caution with which most companies approach M&As.

The doomsayers have been making their grim pronouncements for several years now: only a third of all mergers create value for the acquiring company and less than 40 per cent of all acquisitions can be termed "successful".

Those aren't comforting numbers, but who's paying attention? According to a new joint study by consultancy A T Kearney and Knowledge@Wharton, 467 Indian companies entered into merger and acquisition (M&A) agreements worth $18 billion in 2005; that number almost doubled the following year, with 782 deals collectively worth $28 billion.

And in just the first four months of 2007, 213 deals were signed for $43 billion. From a 0.71 per cent share in global M&A activity in 2004, Indian M&As now account for 1.49 per cent of the total.

India's $43 billion tab looks like loose change compared to the $2,880 billion companies across the world spent on M&As between January and April this year, but India Inc's shopping spree is clearly picking up steam.

The Wharton-Kearney study, which has been made available exclusively to the strategist, questioned 178 business houses on the role of M&As, especially cross-border ones, in their corporate strategies.

About half were greenhorns with no experience in M&As, and just 8 per cent qualified as serial acquirers, having completed more than five deals in the past year.

Still, an overwhelming 76 per cent said they were interested in implementing a cross-border merger or acquisition. More than half, 55 per cent, in fact, were confident the deal would happen within the next 12 months.

There's no impulse shopping, though. Indians have a reputation for being savvy shoppers. They compare, window shop, ensure they're getting value for their money and then bargain for the best possible deal. Clothes or companies, the approach remains much the same.

Which is why only 1 per cent of those polled said their companies were looking at deals worth more than $1 billion; 74 per cent said the acquisitions would be under $100 million.

"Indian companies are only just getting their feet wet. You must expect them to start small," points out Saikat Chaudhuri, assistant professor of management at The Wharton School.

the strategist takes a closer look at the study and the lessons it holds for companies with the urge to merge.

Build or buy?
Why are so many companies interested in M&As? Put simply, ambition and availability.

The target firm's location and geographical reach, the opportunities for expanding product lines and the access to new technology are key factors in selecting a potential partner.

But most organisations are essentially seeking ways to enhance their market power, improve their capabilities and gain economies of scale and scope.

Ranbaxy's acquisition of Romania's Terapia, for instance, helped it gain instant access to new markets and a manufacturing hub in Europe; Tata Motors' deal with Daewoo's trucks units gave it an entry into the higher horsepower truck market; while Holcim's buyout of Gujarat Ambuja Cements helped it take advantage of the Indian company's operating efficiencies and huge capacity.

Then, as they expand overseas on their own, the potential partner game works both ways: while Indian firms identify foreign companies that could offer them all the advantages they seek, very often they are, in turn, wooed for what they bring to the table.

"Pharma and IT companies, especially, see many deals being offered to them," says Vivek R Gupta, managing director, A T Kearney India.

But then, there is more M&A activity in the pharma and IT sectors "" and indeed, in most sectors that are in the growth phase of their life cycles. According to the study, close to 65 per cent of all M&A deals in India are in sectors that are still growing in double-digits.

While banking and financial sector deals account for close to 15 per cent of all M&As, IT/ITES's share is nearly 13 per cent. In contrast, nascent sectors like electronics (1.74 per cent) and transportation (2.71 per cent), and mature industries such as chemicals (5.8 per cent) and textiles (6.44 per cent) see less action.

Regardless of the industry and its life cycle, you'd better have rock solid reasons for wanting to team up with another company. An acquisition for its own sake, rather than to execute a larger, corporate strategy will be a huge mistake, warn experts.

"There is some exuberance, especially after the recent, big-ticket deals. But I would advise against emulating the big players, especially when you get into bidding situations," cautions Chaudhuri.

Instead, good corporate policy depends on first deciding the organisation's vision, determining its objectives based on that and then devising a strategy to carry out those objectives. The goal should be to work towards fulfilling the corporate vision; whether that is achievable more by organic or inorganic growth, then, is incidental.

Typically, though, the build/buy decision is fairly straightforward. Want access to a mature market where entry is expensive and time consuming (Indian pharma firms in the US and Europe)? Buy. Building capacity may hurt demand-supply balance in an industry where demand growth is a gradual process (cement and other commodities)? Buy. Operating in an industry where attrition could erode the organisation's value (services like IT and hospitality)? Build.

Start small
Dealmania doesn't mean Indian companies are paying any price for any company. Just 7 per cent of the respondents to the study said they were considering acquisitions worth $1 billion and more.

In contrast, more than half indicated that they would be looking at deals under $50 million. That fits in with the trend so far: between 2005 and 2007, 88.6 per cent of deals were under $100 million, while just 1.3 per cent crossed the $1-billion mark.

"Most Indian companies are small relative to global standards. This limits their ability to both know about opportunities when they arise and then successfully close them. The bulk of the deals that don't make the headlines are still small ones," points out Gupta.

The caution isn't only about deal size. Most Indian companies prefer hunting on familiar territory, which is why more than half the respondents said their companies are seeking acquisitions in North America, while 44 per cent pointed to Western Europe.

In the past three years, about half of all M&A deals have been in these regions: 43 per cent in the US. "The Anglo-Saxon model is more familiar, not just in terms of language, but in the corporate governance structure, legal systems and business practices," says Chaudhuri.

Of course, that doesn't mean Indian companies will miss out opportunities in other locations. Reliance Industries' deal with Germany's Trevira, Suzlon's buyout of Belgium's Hansen and Germany's Repower, ICICI Bank's acquisition of Investitsionno Kreditny Bank in Russia, Tata Steel's majority stake in Thailand's Millennium Steel, Glenmark's buy of Bouwer Bartlett in South Africa... it's a long list.

Managing mergers
Indian companies are remarkably confident about their ability to successfully execute cross-border M&As. Over a third of the respondents agreed that cultural integration was the most challenging in a cross-border M&A, while a quarter felt people, policies and profiles were the more complex and critical issue.

Still, 52 per cent believe their organisations are "very good" or at least "good" at the task. That's understandable. Indian workplaces are hotbeds of cultural diversity "" if executives can handle that multiplicity, a cross-border merger should be a cinch. "Perhaps Indians are not as challenged by cultural differences," hypothesises Chaudhuri.

But perhaps some of the confidence is because they aren't doing too badly in handling the earlier aspects of the deal.

The study notes that only 35 per cent of global M&As can be considered "right price", where both acquirer and acquired firms' share prices picked up after the deal and where value is likely to be created: examples would include Duke Energy-Cinergy and Freeport-McMoran Copper, Phelps Dodge.

In contrast, 42 per cent of Indian M&As fit that bill: including the Essar-Algamo deal, VSNL-Teleglobe International and Aditya Birla Nuvo-Minacs Worldwide.

Don't uncork the bubbly just yet, though. "This analysis assumes the market is the best judge and knows everything about the potential value creation from the synergy. That assumption may not be true all the time," says Gupta.

He suggests Indian companies take heart from how they fare when compared with best practices in the M&A space, as identified by A T Kearney.

On a scale of one to four, Indian companies scored three and four on all parameters of deciding maturity and capability. According to Kearney's analysis, Indian companies follow a structured approach to pre-deal assessment that's best in class, whether relates to gap analysis, involving in-house cross-functional teams or assessing the market.

They are also becoming more disciplined in their approach to M&As, setting up specialised teams that scout for opportunities and handle post-merger integration, approaching consultants and investment banks when required, and conducting negotiations with a sophisticated, albeit tough, approach.

All of which bodes well for future M&As by Indian companies, especially if they continue with the same caution they've exhibited thus far.

Says Chaudhuri, "Typically, there are two reasons why deals go wrong: overpayment and/or integration difficulties. Indian M&As are likely to see the same success rate as global ones, but it would be heartening if they bucked the trend."