VideoEditor's Note: This article, published in the December 2007 issue of CFO Asia magazine, incorrectly stated that Dr. Reddy's, the Indian pharmaceutical company, set up an institute in Germany to educate children about the dangers of drug addiction. In fact, the institute was established by Betapharm, a German drug maker, before Dr. Reddy's acquired that company in 2006. We apologize for the error.
There are no second acts in American life, F. Scott Fitzgerald sadly pronounced. But the American novelist's observation doesn't apply to Indians journeying to the United States to reignite faded glory.
In February 2007, Sanjay Dalmia walked to a rostrum at the New Jersey offices of a troubled US textile company. He had just bought Best Manufacturing, a supplier to hotels and hospitals, for US$35 million, one of a chain of recent acquisitions that he is seeking to stitch together as an integrated global business, using America as a springboard.
"We're here to build a business, not destroy one," he told the managers of Best, rallying them with a spirited call in support of free enterprise. The scene was incongruous. Dalmia, 63, has shoulder-length gray hair and a patrician face. In his lilting Indian accent, he addressed a roomful of skeptical managers in the state whose most famous fictional son is Tony Soprano. "If we cannot bring this concept of free enterprise to the global market from America," he said, "then some other enterprising part of the world will rightfully do so."
The irony, of course, is that this is exactly what Dalmia and his Indian company were doing. He hails from the family that financed Mahatma Gandhi's audacious bid to toss the British from the subcontinent. They made their money in cement in the early 20th century, but over the years the family fortune fell on hard times. Sanjay devoted his life to politics and charity, but tired of this and turned to running the coterie of businesses that were left to him. Observing the globalizing success of Infosys, the BPO provider, and Dr. Reddy's, the pharmaceutical company, he thought, "Why not my businesses, too?"
Three years and several acquisitions later — in the United States, Romania, and the UK — he found himself in Roswell using words similar to those Bill Clinton used to tout the North American Free Trade Agreement in 1992.
Unbounded Confidence
A surge of cross-border M&A confidence is running through Indian
businesses and it has intoxicated managers across a whole range
of companies. "There's a sense in Indian companies now that they
can buy assets overseas and deliver value," says Sumant Sinha, president
of Aditya Birla Retail, and former CFO of the Aditya Birla
Group. "It's happening in firms of all sizes."
While this attitude is exhilarating, it amounts more to mood than method. Some experts caution that Indian acquirers are only now having their optimism tested by the rigors of post-merger integration — a discipline that Bain & Co. famously says more than 70 percent of companies never master.
"Investors' expectations in the first two years following an acquisition can be very difficult, especially if you're doing a large-scale acquisition," says Rajani Kesari, CFO of Dr. Reddy's European operations and the executive in charge of the company's acquisition of Betapharm Arzneimittel, which it bought for US$571 million in 2006. "I see it as if we're doing our own startup, where the main goal is internal growth rather than delivering on short-term investor expectations." She adds, "You can't lose sight of the strategic and financial goals."
As global acquisitions go, Indian firms have more than given China a run for its money in 2006 and 2007 (see chart, left) for big buyouts. The watershed was the 2006 buyout of Acelor by Mittal Steel, which is run by Lakshmi Mittal (although not officially an Indian deal, as Mittal was registered in London). This year has seen equally significant deals, starting with Tata Steel's US$15.9 billion purchase of British steelmaker Corus. AV Aluminum, a subsidiary of the Aditya Birla Group, bought a U.S. aluminum firm, Novelis, for US$5.8 billion, in a deal which closed in February and was negotiated for the Birlas partly by Sinha.
While the big deals have grabbed the headlines — and, in the case of the debt-laden Tata/Corus, met with some financing woes — what really characterizes Indian transactions is their modest size and great number. In 2006, Indian companies engaged in 223 acquisitions, versus 145 for China. In 2007, Indian companies so far have launched 234 deals, versus 200 from China. The Indian deals are smaller, though. M&A from China so far this year is worth US$26 billion versus US$22 billion for India.
"Indian managers are in a phase in which they think they can do anything," says A.V. Vedpuriswar, an analyst with UBS, who until recently was the dean of the Institute of Chartered Financial Analysts of India, Hyderabad, and is author of several books on risk management and M&A.
"The mindset is upbeat. And in some respects their experience is unique," says Vedpuriswar. "A global bank will add 1,000 employees to captive operations in India in a year. But Infosys has been adding 1,000 employees a month — and absorbing them as well." Youthful optimism plays into it, too, he says. "Many young people have worked now for five or more years and achieved unimaginable success."
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