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India Inc's growing global aspirations
Ruth David, Forbes | October 26, 2006
Corus Group, Europe's second-largest steel producer and the eighth largest in the world, agreed on Friday to Tata Group's cash offer of $8.08 billion with Corus shares valued at $8.51.
The Tata takeover of the Anglo-Dutch steelmaker represents corporate India's biggest buy in what's become something of a global shopping spree. Jindal Steel, for example, is close to picking up a stake in Thailand's largest stainless steel producer, ThaiNox, for $325 million.
In February, generic drugmaker Dr. Reddy's Laboratories acquired the German firm Betapharm for $572 million. In March, wind energy major Suzlon Energy announced the $565 million acquisition of Belgium's Hansen Transmissions, a wind turbine gearbox manufacturer.
During the first six months of 2006, Indian companies have closed on some 76 cross-border acquisitions worth $5.2 billion.
Tata has plenty of experience in M&As. In 2002, its tea division bought a controlling stake in U.K. firm Tetley for $407 million. In 2004, Tata Steel acquired Singaporean firm Natsteel for $486 million. In 2005, Videsh Sanchar Nigam Limited acquired U.S. firm Teleglobe, a provider of voice, data and mobile signalling services, for $239 million.
This year, Tata Tea bought a stake in the U.S. water manufacturer Glaceau for $677 million, and Tata Coffee acquired Eight O'Clock Coffee of the U.S. for $220 million.
Founded in the mid-19th century, the Tata Group now has 96 companies in sectors ranging from services to energy to consumer products. The Group, which last year saw revenues of $21.9 billion, employs around 202,700 people. It has a market capitalization of $49.2 billion.
"Tata has always been pretty solid in its business. This shows how they can weigh risks and do something that in the long term will be world class," says Kai Taraporevala, principal at the corporate funding firm India Advisory Partners.
He points out that firms across the world are now finding they need global alliances to remain competitive. "Corus cannot by itself survive; it needs a player like Cosco or Tata to help it grow."
Once combined, Tata and Corus will become the world's fifth-largest steelmaking firm. The size of the deal has inevitably drawn comparisons with Lakshmi Mittal's acquisition of Arcelor, the world's largest steelmaker in terms of turnover. That deal, which took place earlier this year, was valued at $38 billion. Though Mittal holds an Indian passport, Mittal Steel is based out of London and Rotterdam.
But when questioned on whether the combined firm would look at competing with Mittal Steel, group chairman Ratan Tata was emphatic in his answer. "I don't think our sights are set on trying to equal or better Lakshmi Mittal. I think our sights are set on strategic growth. Should there be a strategic opportunity, we would look at that, but it would not be just to gain a tonnage number," he said at a conference in London on Friday.
Tata Steel, which was set up in 1907, prides itself on being one of the lowest cost producers of steel in the world. Company CEO B. Muthuraman said the company produces steel at $160 a ton. Corus makes it at $540 a ton, mainly because of high raw material costs.
Corus Chairman Jim Leng said at a conference Friday that the firm had been scouting for a strategic partner and a presence in a low-cost country with raw material availability. "India, with its strong and growing economy, indigenous raw materials, rising consumer demand and infrastructure needs was always a favored location," he said.
Plenty of factors have contributed to that impression of India, starting with the government's decision to liberalize the economy in the early 1990s. "At the time, several companies existed because of government protections. They have died out or gone through strategic restructuring and become stronger, more competitive globally," said Taraporevala.
The results show. According to a PricewaterhouseCoopers study, around 76 foreign deals totalling $5.2 billion were finalized during the first half of 2006. Last year, that number was reportedly $4.5 billion.
The trend seems likely to continue, fueled by good growth numbers -- India netted growth of over 8% five times in the last six quarters--and a recent strengthening in the manufacturing sector.
India's Commerce Ministry estimates the country has investment opportunities of $500 billion in the next five years.
And Indian companies are capitalizing on the growth. Sudip Nandy, chief strategy officer at Wipro, says the underlying factor in the company's acquisition story has been one of great confidence. Wipro acquired eight companies since December last year for amounts ranging from $20 million to $56 million.
"We've built a fledgling infrastructure overseas, we have a stronger relationship with our global customers and we have a larger ability to absorb acquisitions because of our strengths," he says.
Indian businesses are trying to learn from the mistakes of peers as they take steps overseas. Nandy estimates there is at least one seminar a month where executives share their experiences on cross-border deals, discussing what to guard against, how to deal with government regulations and other issues. "It's a hot topic in corporate India," he says.
And with the growing size and reach of Indian firms' acquisitions, global banks are now dominating the M&A scene.
G Ravishankar, head of M&A at the investment banking boutique Meghraj SP Corporate Finance, says in deals of over $100 million, it's very likely global banks will be involved. "They [global banks] provide comfort to companies abroad that the Indian acquirers are backed by establishments with funding," he says.
With Indian companies increasingly venturing into European and American markets, they also want to ensure there aren't any cultural or management clashes. Ratan Tata also emphasized Friday that Tata Steel wouldn't impose its leadership on Corus. "Our intention is that Corus will retain its identity for the foreseeable future, will remain an Anglo-Dutch company. The management will be substantially the same."
But the best story of corporate India's global march is that it isn't just the big players who are stepping out of the country. Wipro CFO Nandy says he recently heard of a 30-year-old textile entrepreneur who wanted a bank loan to go buy a unit in Kazakhastan.
"Our first reaction was: Why Kazakhastan? Then we found out that it's one of the leading producers of cotton," Nandy said.
And that story of the nameless, faceless entrepreneur venturing into the cotton fields of Kazakhastan is one of the many indications that corporate India's global aspirations are only growing.