By Ruma Dubey
2006. Oh we all felt so proud! The largest acquisition ever in this world and that label belonged to an Indian company. Tata Steel buying Corus. The price tag was unheard of – a staggering $13.6 billion. We all knew it meant that this would leverage the balance sheet of Tata Steel to the hilt. But we could not be blamed then; after all Indian Inc was undergoing a deep sense of hubris. There were deals galore, smaller but nevertheless it seemed as though Indi was out shopping and the entire world was its market.
When Tata Steel was signing the dotted line, that year, in 2006, Indian companies had reported acquisitions totaling $23 billion and in 2007, there were 34 foreign acquisitions totalling $10.4bn as completed or pending so far that year.
Literally, a frenzy followed Tata Steel-Corus deal. Aditya Birla’s Hindalco bought Novelis for $6 billion. Suzlon announced its acquisition of REPower for $1.6 billion. Ranbaxy and Cipla were both seen colliding head-on, willing to put $5 billion for takeover of Merck. Essar Global announced it was acquiring Algoma Steel for $1.63 billion. It was in 2007 only that Tata Power announced that it was acquiring a 30% stake in two Indonesian coal producers, PT Kaltim Prima and PT Arutmin Indonesia.
Then in 2008, the Tata group was once again at the fore – it announced acquisition of Jaguar Land Rover for $2.3 billion. This was a “moment” for India Inc and there was a lot of chest thumping and victory slaps on the back. For an Indian company to acquire two iconic brands was no small thing. Close on its heels, the same year when the world was on the brink of a complete meltdown, GMR Infra acquired InterGen for $1.1 billion. They termed this buy as “dirt cheap” because of the US subprime crisis.
For two years, there was a sense of disquiet, no deals, no acquisitions; everyone was still assessing their losses. And in the midst of all this, Bharti Airtel made us all proud when it announced a $10.7 billion deal to acquire Kuwait-based Zain Telecom’s African business. This was once again touted to a global telecom deal, catapulting Bharti into the world league.
In 2011, coal prices were ruling at historic highs and at that time, Adani had scooped up Carmichael coal project in Australia and was also developing the mine at Galilee Basin in Queensland, laying a railway line to transport the coal to the coast, all at $16.5 billion. By then, the haze of these big ticket, “proud marquee” acquisitions had started receding. This news was met with more skepticism, more like a ho-hum, routine Indian acquisition abroad. By 2011, the pain of Tata Steel and Hindalco was there for all to see. Bharti was just starting to hurt and Suzlon was soon slumping from the darling of the bourses to a much-shunned stock. Other deals in energy followed – GVK putting in $1.25 billion in Alpha Coal and Lanco Infra buying Griffin coal mine in Australia.
Thus in the background of all this; this frenzy of acquisitions which India witnessed and where we felt Indians were taking over the world, Tata Steel UK now being put on the sale block comes a lesson. A very expensive learning, not just the cost of acquisition but the cost of some 17,000 people losing their jobs, the cost of reputation and not to mention the bleeding on the balance sheet.
Most of these deals are suffering. Many companies might heave a sigh of relief; if Tata’s could show the courage to get out, they too can. Tata Motor’s JLR deal has taken off but that’s about it. The rest are floundering, threatening to take down the companies with them.
So what went wrong? Logically speaking, these acquisitions were essential for taking the next big leap for growth; they had to acquire to stay relevant. But these deals were probably too big; to use an often used cliché, “bit off more than what they could chew”.
Time was also against these deals – when the deals were struck, it was boom time thus all buys were made at massive premiums. And when it was time to start reaping the benefits, the commodities cycle, including energy and coal have crashed. There is a global slump and China has closed down. Thus what looked good then has turned into rotten eggs now.
All these companies under this formula of growth have highly leveraged their balance sheets and that is affecting not just their financial performance but also not leaving any capex for future growth.
Does this then mean that Indian companies should not or rather are not capable of making such big acquisitions? In such deals, pricing is most important; you buy too expensive you are sure to feel the pain. IT and even our pharma companies have been making acquisitions but all these were smaller and those have led to growth and increased profits.
Moral of the story: eat small bites and chew slowly, it will keep you healthy, wealthy and wise!