Indian firms face risks in overseas shopping spree

Mumbai: As first-time buyers, Indian companies shopping abroad run the risk of overpaying or making the wrong purchases altogether.

Brimming with cash and confidence, Indian firms in industries from steel and car parts to pharmaceuticals and energy are for the first time in history looking overseas to tap new markets and buy brands, production and technology.

"The call is: Is there a bit of excessive confidence or exuberance in a few cases? There might be a few hiccups, but the trend of outbound acquisitions on a large scale is here to stay," said Vedika Bhandarkar, head of investment banking at JPMorgan in India.

The overseas march is spurred by strong earnings in an economy growing at nine per cent a year, easy credit and fewer regulatory hurdles.

Dangers include overpaying for control, taking on too much debt, and mishandling the challenges inherent in all takeovers: integrating the target company and making the sum better than the parts.

Given the sharp rise in Indian asset values, recklessly pricing acquisitions is the biggest risk - a lesson Japanese companies learned the hard way in the late 1980s.

"When you have a lot of money, when you are feeling good in life, you can overextend. It is normal human nature. So far that's not the case," said Ratnesh Kumar, India strategist at Citigroup.

Talk of overextension arises as outbound mergers and acquisitions from India rocketed last year to $23.1 billion from $4.47 billion in 2005, according to data provider Dealogic, with $10.7 billion worth of deals already this year - or 60 per cent of the total from Asia outside Japan.

"Having done small deals, things have gone well, so the corporate confidence of being able to do acquisitions on a much larger scale is much higher," Bhandarkar said.

Breakthrough deal

The breakthrough deal was Tata Steel's record-breaking $12 billion takeover of Anglo-Dutch producer Corus Group - a company with four times its sales.

Tata raised its offer several times in a bidding war, and acknowledged that the nine times EBITDA valuation paid for Corus was high - it compares with the 6.2 times that Mittal Steel paid for Arcelor. It argued, though, the price made sense as it gained capacity and technology.

Last year, heated competition forced India's Ranbaxy Laboratories to pay four times sales for Romania's Terapia after it lost out in a race to local rival Dr Reddy's Laboratories to buy Germany's Betapharm, which cost three times sales.

The deal flow is good news for investment banks such as UBS, Goldman Sachs and Morgan Stanley, the top advisers on Indian M&A deals of all types.

So far this year, Hindalco Industries has struck a deal to pay $3.5 billion for US aluminium products maker Novelis, while wind turbine maker Suzlon Energy agreed to pay one billion euros for REpower Systems of Germany.

"The reality is business confidence is quite high. Cashflow is strong for good companies, balance sheets are underleveraged and there's ability to invest," said Citigroup's Kumar.

Corporations have no plans to slow down

Many more deals can be expected in the future: Ranbaxy was among multiple bidders last week for the generic drugs unit of Germany's Merck while domestic rival Cipla joined with private equity firms in a takeover battle expected to be worth about $6 billion.

Reliance Industries, meanwhile, was reported by media to be eyeing a stake in France's Carrefour, the world's second-biggest retailer. On a smaller scale, electrical products maker Havell's India last week agreed to pay $300 million for Frankfurt-based SLI Sylvania's lighting business.

JSW Steel has said it is looking at overseas acquisitions, while Reliance was reported by media to be eyeing a Nigerian refinery and a petrochemicals complex in the Gulf in deals worth a combined $10 billion.

"I see industry leaders across all sectors going outbound," said Raj Balakrishnan, director for investment banking and M&A at DSP Merrill Lynch, predicting that 15 or 20 Indian M&A deals of all types worth $500 million or more will occur in the next year.