More steel for emerging
India By Siddharth Srivastava
NEW DELHI - Tata Steel's planned US$8
billion acquisition of Anglo-Dutch steelmaker
Corus would mark a new high in the ongoing
globalization of Indian business.
According to Indian Commerce Minister
Kamal Nath, the deal, which would make Tata one of
the top six steel groups in the world, highlights
the growing ability of Indian industry to launch
bids and complete acquisitions on foreign soil.
"Indian industry is just starting to take
off, and I think the center of
economic activity is changing
from the Atlantic Ocean to the Indian Ocean. These
[synergies] are pointers in that direction," Nath
said.
Corus shareholders are still to
approve the purchase by Tata, and reports said on
the weekend that the Brazilian steel giant
Companhia Siderurgica Nacional had made approaches
on a possible rival takeover offer.
In a
statement, the Confederation of Indian Industry
has said the Tata Steel-Corus deal is a sign of a
confident India Inc and reflects the integration
of Indian industry in the global economy.
The Tata-Corus deal, if approved, would
also substantially up again the record held by the
country's largest corporate house, Tata Group,
which recently acquired the US-based Glaceau, the
maker of vitamin drinks, for $677 million, so far
the largest-ever overseas buyout by a private
Indian company.
That deal eclipsed the
acquisition of German generic-drug maker Betapharm
by domestic pharmaceuticals giant Dr Reddy's in
February from US-based private equity firm 3i for
$572 million, one of the largest pharmaceutical
deals by an Indian company.
Tata's
acquisition of Glaceau only lagged behind
state-owned Oil & Natural Gas Corp Videsh's
15% acquisition of Petrobras' BC-10 block in
Brazil for $1.4 billion, the biggest by any Indian
company, a record that would be considerably
shattered by the Tata-Corus deal.
Indeed,
the emerging India story is spreading quickly.
Tata's buyout of Corus should make India a net
exporter of foreign capital for the first time
this fiscal year (the government has set an inflow
target of $12 billion), which is not a cause for
worry as India's foreign-exchange reserves should
soon cross $200 billion, because of a rapidly
growing economy.
According to analysts,
companies are going global because they're focused
on organic growth but find that their home markets
don't have the scale or the resources to allow
them to deliver the levels of shareholder value
and competitive advantage they want to achieve.
They aim to tap into new profit pools or gain
long-term access to raw materials.
In an
interview, Tata Group chairman Ratan N Tata has
said the conglomerate is not about to rest on its
laurels. The group plans to expand its growth into
countries in Africa, East Asia and Latin America.
The Tata Group comprises 93 operating
companies in seven business sectors with revenues
of $17.8 billion in 2004-05. (Incidentally, it was
the Tata Group that acquired the United Kingdom's
Tetley Tea for $431 million five years back,
starting the trend of Indian acquisitions abroad.)
The advantages Indian companies enjoy
include low labor costs, access to skilled
manpower, and the ability to deliver quality at a
low price. By 2010, China and India combined will
graduate 12 times the number of engineers,
mathematicians, scientists and technicians as the
US. A skilled factory worker costs $1-$5 per hour
in this region, versus $20-$25 per hour in North
America, Japan or Western Europe.
As per
data for 2006, Indian companies have so far
announced more than 130 acquisitions overseas,
estimated to be worth nearly $19 billion. In
comparison, acquisitions announced by foreign
companies in India were estimated at $9 billion.
According to government figures, foreign direct
investment (FDI) between January and July was
estimated at more than $4 billion - turning India
into a net exporter of capital so far this year.
This June saw the closure of 10
cross-border big-ticket deals with a combined
transaction value of $1.5 billion.
According to global consultancy firm
PricewaterhouseCoopers, India Inc has recorded
more mergers and acquisitions (M&As) in the
first half of 2006 (excluding Tata-Corus) than in
the whole of 2005.
India has surpassed
China and South Korea to grab the third position
in the Asia-Pacific M&A league, lagging behind
only Japan and Australia. Indian companies struck
M&A deals worth $25.6 billion in the first six
months of 2006, up from $8 billion in the first
half of 2005, and $23.6 billion for all of 2005.
In the United Nations Conference on Trade
and Development index of outward FDI performance,
ranking 132 economies, India improved its rank
from 80 in 1990 to 54 in 2004. Observers say this
is the beginning of a global presence for Indian
companies; some have said that India Inc is now
gripped by Mittal mania. It may be recalled that
Indian steel tycoon Lakshmi Mittal recently
clinched a $31 billion takeover bid for Arcelor
Steel, making the conglomerate the biggest steel
producer in the world.
According to a
recent report by the Boston Consulting Group,
companies based in developing economies are
winning in global markets, making major
acquisitions, and emerging as important customers,
business partners and competitors to the world's
largest companies.
In the top 100
companies from rapidly developing economies, Asian
companies formed 70% of the list. China and India
have the most companies on the list, with 43 and
21, respectively. They include some obvious names,
such as China's Lenovo, China National Offshore
Oil Corp and the Indian
information-technology-services giants Infosys,
Tata Consulting and Wipro.
Indeed, the
overall picture reflects this trend. India's FDI
outflow as a percentage of gross fixed-capital
formation (GFCF) have risen steadily. From 0.01%
in 1983-85, it rose to 0.1% in 1993-95 and then to
1% in 2001-03. As opposed to this, China's FDI
outflow as a percentage of GFCF grew from 0.3% in
1983-85 to 1.3% in 1992-95 and then fell to 0.9%
in 2001-03. The corresponding figures for Brazil
were 0.3%, 0.7% and 0.2%.
A survey carried
out by Grant Thornton India in May suggests that
corporate India is looking forward to aggressive
growth through the M&A route. According to the
survey, 81% of the 200 companies were exploring
the M&A option to grow. Of the total, only 30%
of the companies had actually undertaken any
M&A in the past, indicating the possibility of
a sharp increase in M&A activity in the near
future.
Predictably, Indian
software/business process outsourcing (at 33.6%)
and pharmaceutical/health-care (at 20.5%) sectors,
account for more than half of the overseas
acquisitions.
Indian firms had established
their outward trend last year as well. In 2005-06
State Bank of India has emerged as the No 1 Indian
investor abroad, with more than $1 billion in
Mauritius, Indonesia and Kenya, according to
recent figures by Crisil.
Dr Reddy's
Laboratories was the second-biggest Indian
investor. Among the other top investors of 2005-06
are Suzlon Energy, Tata Steel, Ranbaxy
Laboratories, Videocon International, VSNL, Matrix
laboratories, TCS and Wipro.
Indian
companies invested more than $1 billion in the US,
followed by $800 million in the UK, says the
report. Other countries with substantial Indian
presence are Belgium ($790 million), Germany ($657
million) and Thailand ($486 million).
Pharmaceuticals, banking, metals and
energy are the main sectors in which capital has
flowed abroad.
Major acquisitions this
year have been India's largest wind-energy firm,
Suzlon Energy, acquiring Belgium's Hansen
Transmission International for $324 million. In
March, pharmaceuticals giant Ranbaxy also made a
large foreign acquisition of $372 million, with
the buyout of a 96.8% stake in Romania's Terapia.
The largest-ever acquisition by an India
company abroad in the paper-and-pulp industry was
made by Ballarpur Industries, which along with
JPMorgan acquired a 97.8% stake in Malaysia's
Sabah Forest Industries for $261 million.
In the automotive sector, Tata Motors and
Mahindra & Mahindra have adopted the M&A
strategy to become multinationals. Bharat Forge
now derives substantial revenues from its overseas
acquisitions. In the chemical industry, Asian
Paints, Tata Chemicals, United Phosphorus and GHCL
have made acquisitions in Egypt, Romania, the US
and the UK.
In the consumer sector, Dabur,
Godrej and Tata Tea have made sizable
acquisitions. In health care, Dr Reddy's, Ranbaxy,
Wockhardt, Nicholas Piramal, Jubilant and Sun
Pharma are global names. Tata Coffee acquired
US-based Eight O'Clock, which is about 2.5 times
its size.
Siddharth Srivastava
is a New Delhi-based journalist.
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