INDIA INC’S GLOBAL FORAY HAS BEEN A MIXED BAG
The concluding part of the series on the 10 years of Lehman crisis takes a look at how Corporate India’s acquisitions abroad have fared
In 2006, just two years before the Lehman crisis had hit the global financial markets, two top Indian business houses— Tata and Aditya Birla— made headlines by acquiring large companies abroad. The acquisition of Novelis by Birla’s Hindalco for $6 billion and the buyout of Corus Steel by Tata Steel for $12.3 billion gave massive confidence boost to India Inc.
The global economic boom and cheap equity capital thanks to stock markets at stratospheric levels before the Lehman crisis put global companies on the radar of Indian business leaders.
But the global financial crisis came as a black swan event, changing the mood from exuberance to despair.
After losing billions of dollars over a decade, Tata Steel announced last year that it would merge its European operations with Germany’s Thyssenkrupp. Birla, on the other hand, went ahead and bought yet another company – Aleris Corp in the US in July this year for $2.58 billion to bolster the product portfolio and market opportunity for Novelis.
“We bought Novelis for $6 billion and we got equity of $3 billion back in the first three years itself. So our real capital invested in Novelis was about $3 billion. The value of Novelis today would be about $11-12 billion. So clearly we have gained in this acquisition,” said Kumar Mangalam Birla, Chairman of the Aditya
Birla group. “The acquisition also helped Hindalco to move towards more value added products which has very high margins and it faces less volatility due to London Metal Exchange prices,” he added.
Tata Motors’ acquisition of UK’s luxury car maker Jaguar Land
Rover (JLR) for $2.3 billion just a few months before the Lehman crisis hit the headlines proved to be a financial and strategic success for the car maker and the Tata group. The company not only managed to survive the global economic turmoil that followed soon after the purchase, JLR emerged as one of the fastest growing luxury car makers and went past Japanese brands to become the fourth biggest luxury automotive brand behind the big-three German luxury car makers.
For most of the last decade the JLR division accounted for the bulk of Tata Motors’ consolidated profits and nearly two-third of its overall revenues. More importantly, JLR provided Tata Motors with the technology and product development experience that the company is now using to claw back its share of the domestic passenger car market. However, its massive investment in JLR now faces headwinds from the likely economic and trade dislocations caused by UK’s planned exit from the European Union next year.
In contrast, Corus (renamed Tata Steel Europe) was never value accretive for Tata Steel and its losses were a drain on the company’s profitable domestic operations. Analysts say that Corus did give Tata Steel access to some of the latest technology in steel alloys but it carried little financial value in an environment of de-growing European steel demand following the 2008 crisis.
Experts say that at the macro-level the fate of large global acquisitions depends on the business cycle, “In the case of Corus, Tata got caught in the global downturn in the steel industry post 2008. In JLR they got a tailwind from the global upturn in consumer demand, where for example the US had seen seven consecutive years of growth in passenger car demand,” says Dhananjay Sinha, head of research, Emkay Global Financial Services.
“With the Corus acquisition, Tata Steel got stuck with the high-cost and low growth of the European steel market. In contrast, JLR opened the gates to global market for Tata at a time when the demand for luxury cars bloomed in China and other emerging markets,” says G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.
Sunil Mittal’s Bharti Airtel, which took over Zain’s Africa operations for $10.7 billion in 2010 during the postLehman recovery says that he regrets making the acquisition as financial returns didn’t match up to the bigbang investment. Analysts, however, say that the Africa business has cushioned the blow from the margin compression in the Indian telecom market. The last fiscal year marked the first time that the company made more profits in Africa than in its bread-and-butter India business. In terms of revenues, Airtel’s Africa business is still less than half that of the company’s India mobile business.
Reliance Industries’ $10 billion investments in shale gas assets in the United States also did not go as per plan.
“The Lehman crisis did not deter Indian companies from buying asset abroad. There is no golden bullet for success. Indian industrialists will have to take that leap of faith in the future also,” said the head of M&A of an investment banking asking not to be quoted. “The Lehman crisis did slow down India Inc's investments abroad but it did not stop them,” he added.
Back home, soon after the crisis, Indian companies went on a massive expansion drive as economic growth picked up pace and the Indian economy began to grow faster than the developed markets on which most of the big-ticket acquisitions were focused.