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Mega deals could spell disaster in India

Thursday, Mar 22, 2007
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After a long history of rarely venturing outside their home market, Indian companies are suddenly discovering the international mega deal. Since Tata Steel acquired the Anglo-Dutch Corus group last year for $13.2 billion, dwarfing all previous Indian acquisitions abroad - and Tata's own sales -something of a stampede has developed to buy foreign assets. The latest to join the herd is Reliance Industries, which is seeking a 13 per cent stake in France's Carrefour supermarket chain.

The burst of activity says much about the mood of national self-confidence generated by faster economic growth and by the international success of India's software and services industry. Many Indian companies now view global competition as an opportunity to be embraced, rather than as a threat; much improved profitability, the fruit of extensive restructuring, has provided the means to afford their new-found ambitions.

However, the trend raises some difficult questions, notably for the acquiring companies' shareholders. First, many of their targets look expensive and deals are commonly being financed by assuming large amounts of debt. Second, their quality is decidedly mixed. Corus suffers from falling profits and high costs, while Novelis, a Canadian aluminium company for which India's Hindalco is bidding $6 billion, is in loss. Those factors leave the new owners with little margin for error.

Third, the industrial logic in a number of cases looks questionable. It is understandable that Indian companies should want to strengthen their competitive position by obtaining access to new technologies, knowhow and foreign distribution networks. They are also in a hurry to make up for lost time.

However, it is less obvious why they need to do so by making big acquisitions when other options, such as alliances, joint ventures and licensing deals would be cheaper and less risky. They would also consume fewer management resources. It is equally curious that so many Indian acquirers are focused heavily on expanding in the west, rather than in developing countries, where the operating experience they have gained at home could be more of an advantage.

Many of India's top managers are, it is true, of high calibre and have shown an impressive ability to overcome severe obstacles and handicaps in their home market. Culturally, they are also better-equipped than Chinese managers to deal with the outside world. However, there is a danger that the current climate of national euphoria will induce corporate over-reach and that tribalistic rivalry between the large family-controlled groups that dominate much of Indian business could turn into a race to win status by snapping up ever bigger trophy assets.

 

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