One reason some global acquisitions are floundering is the total cost of overseas employees.
It was early 2007 and I was participating in a round table of sorts. The discussion veered to the economic headlines: Indian companies were on an acquisition spree. The names were flying thick and fast. Mittal, Jaguar Land Rover, Novelis and Corus. Indian corporate flags would soon fly at locations that ranged from the formidable to the exotic. From Pindamonhangaba to Poland and Tafarnaubach to, well, Tipperary.
My friend who runs a mid-size engineering company down south seemed like a loner on that round table. His firm had the cash, the latent desire and the opportunity. Not to mention the investment bankers pounding at his door. But he would not budge. “I don’t speak German or any of these European languages. What will we do by buying these plants,” he asked simply. “Expand, grow, become global,” everyone said. He was quiet.
Last month I encountered my friend again. “Things are okay for us. But every company I know that went out and bought engineering assets is crying,” he told me, adding how much cash his company was sitting on. The amount was large by any standards. Nor was there any debt on his books. Better still, he said, his key European competitor was teetering on the verge of collapse. All in all, he was doing okay. By doing nothing.
The time of reckoning for the great global asset chase has come. For the June quarter, Tata Steel reported a consolidated loss of Rs 2,209 crore. It was not that the Tata-Corus combine was expected to turn in profits. But expectations were of an approximately Rs 800 crore loss. Not a number three times as much. Year on year, Corus’ sales have nearly halved. On high raw material costs and expenditure.
It’s no different for Tata Motors. The exuberance that followed the purchase of Jaguar Land Rover is fading. And consolidated numbers for the year ending March 31 were already showing a Rs 2,500 crore loss, compared to a profit of Rs 2,167 crore the previous year. And Tata Motors’ total outstanding debt stood at over $3 billion. For which S&P announced a downgrade.
Several questions will be asked over the next year or even beyond as companies struggle to balance the cost of their acquisitions with the benefits they will derive. First, was it worth it? Second, what have been the advantages? Third, did Indian companies have the choice or the option not to venture overseas as they did so adventurously in the last five or six years?
I remember interviewing Tata Group chairman Ratan N Tata around five years ago at the Taj Mahal Hotel in Mumbai. The Taj, a Tata company, was itself changing colours. Raymond Bickson had joined in July 2003. He was one of the few, if not the first, expats to run an Indian-owned company. Mr Tata’s objective was to bring in world-class expertise, practices and of course culture. As he put it, and I inferred, a multicultural workplace was a strategic objective. And the Taj quickly acquired several premium properties overseas.
He is not alone. I learnt one reason Jet Airways founder Naresh Goyal is keen on expatriate pilots on international flights is to make passengers feel part of a global product. To be fair, this is the Indian pilots’ view. Their complaint: this puts a spanner in their career progression — for example, to wide-body aircraft — though they do not object to the objective. And yes, “give us the same salaries as the expat pilots!”
So one reason some global acquisitions are floundering is the total cost (including pensions) of overseas employees. While most managements, including those mentioned above, are out with the proverbial hatchet, the decline in demand for their products has been faster. And the added problems of the credit squeeze. Jaguar Land Rover fits this bill.
I have put the straight question: “Has your overseas acquisition worked for you?” to several CEOs in the last year. The answer is mostly in the intangibles. “It’s the knowledge of manufacturing and processes which we have gained the most in,” many have told me privately. The problem of course is that the pace of conversion of the intangible to the tangible has got horribly stuck.
Which leaves the last question: Did Indian companies have the choice? The answer, even at this point, is no. It is clear that Indian companies’ hunger for growth could not be satiated by domestic greenfield expansion. In any case, there was hurdle after hurdle to encounter. And there still are. So there was little choice. And of course money was cheap and the investment bankers were calling.
It’s worth asking how Tata Steel’s fortunes would be if the company started off on its Orissa project or for that matter Jharkhand or even the old west coast project, had they all fructified. Chances are it may have had its plate too full to look at a Corus. And yet, a Jaguar Land Rover would have been tempting. And there is the badge to wear.
It’s telling then that Tata Steel in a recent statement has taken comfort from the performance of the Group’s Indian operations. Maybe that’s what going global was meant to be. An upcycle here during a downcycle there. And the other way round. The final million-dollar question: Should Indian companies have invested in Taloja or Tipperary? Well the jury’s still out on that.
The writer is Editor, UTV Business News
