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Why Indian firms tread lightly when they acquire overseas.
Tom Leander, CFO Magazine
February 1, 2008
Editor's Note: This article, published in the February 2008 edition of CFO magazine, incorrectly stated that Dr. Reddy's, the Indian pharmaceutical company, set up a corporate social responsibility program in Germany to educate children about the dangers of drug addiction. In fact, the program was established by Betapharm, a German drug maker, before Dr. Reddy's acquired that company in 2006. We apologize for the error.
India is supposed to be the place that steals jobs from hardworking people on Main Street USA. Now, fortified by a strong rupee and flush with cash, India Inc. is looking to buy a piece of Main Street. But its companies are doing it with sensitivity toward local communities. It's a strategy that all acquiring U.S. companies, and their CFOs, should adopt.
There have been a few headline-grabbing deals, such as Tata Steel's 2007 US$16 billion acquisition of UK-based Corus, but most recent Indian overseas buyouts have been modest in scale. "The ticket sizes of the deals are much smaller than you see in China," says Anish Tripathi, director of markets and chief knowledge officer for KPMG in Mumbai. Since big banks tend to avoid deals under $100 million, many Indian companies have opted to go through the process by themselves, based on their own networking and research. "They're driving deals with their own people," he says.
To some Indian acquirers, this means approaching the buyout mindful of how those acquisitions will play in the local market. Infosys Technologies Ltd., the Bangalore BPO giant that has served as a symbol of rising Indian economic might, has launched only a handful of acquisitions, and has gone about these with extreme delicacy. "Everyone assumes that we're going to slash and burn and send two-thirds of the people home," says Deepak Natraj, Infosys's head of strategic initiatives. "But when you send home the workforce, what are you paying for?"
Natraj advises opening channels to local governments and community leaders as soon as possible in the acquisition process. He prefers leaving the local CEO — as well as the human-resources director — in place. "They tend to have better skills for that marketplace," he explains. Natraj replaces the staff that links the company with its centralized processes, most importantly in finance. And he installs a new CFO, who becomes the chief integrator.
Other companies have adopted this approach. Indian pharmaceutical firm Dr. Reddy's appointed European CFO Rajani Kesari to integrate its 2006 acquisition of Germany's Betapharm into the firm. Kesari leveraged Dr. Reddy's experience running corporate social responsibility (CSR) programs in India, starting a school program in Germany to warn children of the dangers of drug addiction.
CSR is one way; the direct approach is another. The Sanjay Dalmia Group acquired Best Textiles, a U.S. supplier to hospitals and hotels, last year and is transforming the business into a sourcing and exporting operation. "If we cannot bring the concept of free enterprise to the global market from America," CEO Dalmia told workers at a New Jersey plant, "then some other enterprising part of the world will rightfully do so." Workers bought it, and the company, once bankrupt, is now profitable.
How ironic it would be if, in the killer world of cross-border M&A, the human touch turned out to be the killer app.
Tom Leander is editor-in-chief of CFO Asia.