Indian investors are sprinting eagerly towards attractive targets overseas, although they are taking more careful strides. A mix of economic uncertainty and a fear instilled by fractured deals are two important reasons Indian buyers are adopting a more calculated approach to outbound acquisitions and investments. Today, investors are exercising greater vigilance before signing on the dotted line.

“There’s far more due diligence going in,” says Sriram Chakravarthi, a partner in the India practice at Shook Lin & Bok in Singapore. “There have been a lot of horror stories … litigation and lots of arbitration that have come from going the cowboy way.”

Sriram Chakravarthi Partner Shook Lin & Bok

Companies have learned lessons from deals struck by large Indian businesses, many of which have produced lacklustre results. “None of the big deals over the past few years have really worked,” says Naina Krishnamurthy, the managing partner at Krishnamurthy & Co in Mumbai. “Investors are very wary anyway of making large investments abroad.”

Despite this, outbound investment continues to be strong. According to the Reserve Bank of India, overseas investments by Indian companies totalled US$2.06 billion in October and US$3.46 billion in September. The total value of outbound investments by Indian companies reached US$19 billion in the first six months of the financial year 2011-12, which started on 1 April.

“There is a huge opportunity for Indian investors to go overseas,” says Rajeev Uberoi, general counsel and group head for legal compliance at Infrastructure Development Finance Company (IDFC) in Mumbai.

Robust activity

Over the past year, Indian investments have reached all corners of the globe including the US, the UK, Italy, Germany, Saudi Arabia, South Africa, the Netherlands, Australia, Japan, Bahrain, Singapore, Hong Kong, Myanmar, Barbados, Venezuela, Nigeria, the Czech Republic, Ethiopia, Russia, Qatar, Germany, Bhutan, Bangladesh, Spain and New Zealand.

And it’s not just India’s top-tier companies that are spreading their wings far and wide. Many of today’s investments are inked by flourishing mid-cap companies.

Dabur India acquired a US-based personal care company, Namasté Laboratories, for US$100 million; Windlass Steelcrafts, a manufacturer of high-quality weapons and handicrafts, purchased Spanish company Marto, a manufacturer of decorative historical swords, for US$34 million; and Gitanjali Gems bought an Italian jewellery company, DIT Group, for US$11 million. (See page 26 for a list of the top 40 M&A deals over the past 12 months).

The ambition of the so-called “second-tier” companies and their desire to explore new markets has excited lawyers and investment bankers alike. The volume of their transactions far exceeds that of India’s top-tier corporate moguls and indeed their foreign counterparts.

Sampa Bhasin, India-EMEIA (Europe, Middle East, India and Africa) cross-border transactions leader at Ernst & Young in London, says most of these companies appear to be “doing a first transaction to build in a platform and then going in for serial acquisitions or a bolt on acquisition [to enhance the company’s value].”

While Indian investors strike deals in sectors such as renewable energy, information technology, businsess process outsourcing, fast-moving consumer goods and motor vehicles, the number one priority today is resources – a sector that promises to maintain its lure over the next few years. Interest in resource assets has reached boiling point.

“I was in India a few weeks ago and I can’t tell you how many companies were saying, ‘If you could identify us a coal target no matter where it is, including in the US and in South America, Africa and Australia, that’s something that would be of interest’,” says Stephen Besen, a partner at Shearman & Sterling in New York.

The race for resources

The heavyweights of India Inc and the country’s state-owned entities are all fiercely competing for assets in natural resources and commodities, but small and mid-size players have also been active.

Chakravarthi says that several private mine owners from India are going into Indonesia. “This never gets reported, but there are so many of them who want to acquire small coal mines and flip them for a profit,” he says.

Tata Power and Essar have investments in Indonesia and as a result Indian companies are comfortable with the business and regulatory environment there. GMR Energy recently purchased a 30% stake in Indonesia’s Golden Energy Mines for US$550 million.

Familiarity is still being developed in countries like Australia and Canada. “It’s virgin territory” says Krishnamurthy. “These are new markets and investors are still getting to grips with the regulations, business licences, labour laws, etc.”

Despite this, recent deals in the resources sector include three in Australia: Adani Enterprises’ US$1.98 billion purchase of Abbott Point Coal Terminal in Queensland; Lanco Infratech’s US$575 million buyout of Perth-based Griffin Coal; and GVK Power & Infrastructure’s acquisition of a stake in the Hancock Group’s Alpha Coal mine and Alpha West Coal projects for US$1.26 billion

Litigation has followed Lanco’s acquisition of Griffin Coal. Two Griffin customers have accused Lanco of refusing to meet its commitments and Griffin lost the initial round of litigation before the Supreme Court of Western Australia.

To avoid creases like this, “what needs to build up is a bit of deal experience and familiarity with the local context,” says Justin Shmith, a partner at Blake Dawson in Melbourne.

As for Canada: “There are a lot of junior resource companies listed in Toronto and Indian companies are looking at Canada because of the nature of what’s listed there – North American industrial companies and also global resource companies,” says Devin Kohli, associate director, Indian corporate advisory, at Investec Bank in London.

Unlike in the UK, Australia and South Africa, investment banks do not play a leading role in M&A deals in Canada. “If you’re doing a takeover on the Toronto Stock Exchange, it’s completely lawyer-driven. The banker is very much secondary,” Kohli says.

Indian bidders are facing intense rivalry from their counterparts in the US, Japan, Korea, Singapore, China and Japan for coal, iron ore and mineral assets to fulfil urgent energy needs. Many resource assets have already been procured and those that are left require vast amounts of capital.

“A lot of the smaller, independent coal companies have disappeared and many of the coal projects left require significant amounts of infrastructure,” says Shmith. “There are some truly massive resources in Queensland but the amount required to develop them is also large.”

Under such pressure Indian buyers are forced to balance caution with speed when chasing these targets.

Devolving power

Slow decision making is a major handicap for Indian investors. On occasion, eagerness followed by sluggish execution has left vendors unimpressed.

“Indian companies are very quick to execute confidentiality agreements and make offers, but then turn away because they haven’t really analysed whether or not they want the asset,” says Shmith.

Calling on africa: Indian companies are flocking to Africa to capitalize on a virtually untapped consumer market.
Calling on africa: Indian companies are flocking to Africa to capitalize on a virtually untapped consumer market.

The management styles of family-owned companies is often to blame for delays in decision making. These entities generally rely upon the company head to make every decision and frequently this person can be hard to pin down.

“Once you start growing, having the promoter involved in every decision is cumbersome,” says Besen at Shearman & Sterling. “I see it with the larger companies. Getting the promoter’s attention is very difficult. You can only go up to a certain level before you’ve got to get them to sign off and that may take a while.”

Kohli at Investec says these delays can be frustrating from the target’s perspective. Worse still, it makes Indian companies “seem like they are just fishing”.

“They won’t follow up and people assume then that they are not serious or that they are indecisive,” Kohli adds. However, he is quick to point out that this is not an issue in India’s technology sector. “Companies like Wipro and Tata are very confident and they move very fast.”

Delays in decisions have meant that Indian companies have lost out to more decisive Singaporean, US or UK rivals. “You have to move very quickly with listed companies,” warns Kohli.

They have also lost out on automotive acquisitions in Germany and central Europe to Chinese companies who have moved “very, very fast”, according to Bhasin at Ernst & Young. “That is maybe a lesson for Indian corporates they have to be a bit more nimble,” she says.

Lawyers say companies can tackle such inefficiencies by devolving power and deploying someone on the ground where the acquisition or investment has been planned. The designated person should liaise with external and local counsel to ensure smooth communication among all parties.

In addition, Shmith says Indian investors need to ascertain “whether the asset is going to suit them, what expenditure is required and whether they have the skills and resources to exploit it” before they enter into negotiations.

Impressing the vendor

Purchasing an interest in a company through an auction process calls for bidders to outshine their competition. They need to demonstrate an understanding of the vendor’s local context and convince the seller that they can and will deliver.

This is one area where Indian companies are beginning to excel. “Godrej acquired a 51% stake in Darling Group, a hair care business in South Africa,” says Kohli. “Darling was very impressed with the Godrej Group. They have a footprint in Africa, they understand the geography and they understood the business very well.”

Indeed, perceptions of Indian companies have improved so much that vendors actively seek out Indian buyers. “In any international auction, it would not be surprising for banks to ask who the Indian entities are,” says Raj Karia, a partner at Norton Rose in London. “Five years ago, India was very much an afterthought – they wouldn’t and couldn’t buy.”

Raj Karia Partner Norton Rose

The UK Anti-Bribery Act, US Foreign Corrupt Practices Act and other anti-corruption legislation has heightened scrutiny on all transactions, especially where they involve emerging market players. However, this has not stifled international appetite for Indian company partnerships.

Bhasin believes India’s efforts to address problems in these areas have helped to alleviate fears about corporate mismanagement and corrupt dealings. “If someone had told me five years ago that there would be an Indian minister in jail, I would have laughed,” she says. “People see there has been a move to tackle corruption and do something about it.”

Like attracts like

Indian companies’ sensitivity to emerging markets such as Indonesia, South Africa and Brazil has enhanced its reputation and success. Some observers attribute this sensitivity to cultural and economic similarities in the way transactions are conducted in these countries and India. (See page 22 for a discussion of cultural norms in Brazil and Colombia).

“Africa has become a big theme,” says Bhasin, “especially if there is a consumer angle to it.”

Sampa Bhasin India-EMEIA Leader Ernst & Young

One of last year’s most memorable acquisitions was Bharti’s US$9 billion takeover of Kuwaiti telecommunications company Zain’s operations in 16 African countries. The transaction took less than four months from the start of negotiations to the closing on 8 June 2010. Vijaya Sampath, group CEO at Bharti, attributes the swiftness to the desire of both parties to see the deal through to fruition.

Indian players have also found great success in Singapore. The city-state’s financial sophistication and its cultural and geographical convenience make it an important stepping stone for Indian companies with regional aspirations, such as Fortis Healthcare, Spice Mobility and Godrej.

“We’ve incorporated companies for something as small as a pappadum maker to big-ticket ones wanting to set up special purpose vehicles in order to invest in Australia,” says Chakravarthi.

Spice Mobility’s enthusiasm for Singapore is evident from its local acquisitions and its listing on the Singapore Stock Exchange. The Indian group plans to set up a consortium of telecommunications manufacturers in the region and brand it under the Spice name.

“In this region, the demand for handsets is increasing and if you can provide a low-cost alternative to Nokia and Motorola you’re in a very good line of business,” says Chakravarthi.

Where Indian companies may struggle is in developed markets “where people aren’t used to taking orders from a foreigner”, says Karia.

Uberoi at IDFC observes that Indian companies are in general still not sufficiently aware of laws and regulations in developed markets. “They are excited to have a global footprint, but they need to be alive to the kind of risks they are taking,” cautions Uberoi. “In developed markets, the margins are lower and the risks higher, because you’re dealing with the big sharks.”

Suzlon’s difficulties in taking over German wind turbine company REpower is a case in point. Suzlon increased its holding in REpower over a few years, raising it to 92% in 2009. However, under German regulations to gain full control of REpower, it had to increase its stake to 95% so it could forcibly acquire the remaining 5%. This proved to be difficult.

“Suzlon certainly underestimated the power of minority shareholder protection in Germany,” says Benjamin Parameswaran, a partner and co-head of the India group for continental Europe at DLA Piper in Hamburg. He believes understanding the complexity of such processes is vital for Indian investors when entering European markets.

Parameswaran points out that although European markets are much less regulated and there are no closed sectors, “Germany has very complex labour and tax laws which may make restructurings more difficult than an Indian or foreign investor would imagine.” (See page 24 for investment opportunities in Bulgaria).

Benjamin Parameswaran Partner DLA Piper

Financing the dream

Raising debt outside India for acquisitions or investments is one of the biggest challenges Indian companies face. And against the backdrop of the European economic crisis, this will only get tougher.

“What we hear from our clients is that banks overseas are very sceptical about deploying funds,” says Gunjan Shah, a partner at Amarchand & Mangaldas & Suresh A Shroff & Co in New Delhi.

For the moment, Indian investors may have to rely heavily on Indian banks dotted around the world. India’s shopping spree is typically financed by Indian banks through Singapore and London on an external commercial borrowing basis.

“Indian corporates are well capitalized and Indian banks tend to have a bit of a mandate to support India Inc as it internationalizes,” says Karia. “For the right opportunity there doesn’t seem to be a problem in attracting money.”

The cosy relationship between Indian companies and their bankers may not get them very far in the US, where vendors require a firm commitment from the banking group involved. “Not only do US sellers want you to show that you have banks ready and prepared to provide signed commitment letters for bank financing, but they want to know where your equity is coming from,” says Besen.

Stephen Besen Partner Shearman & Sterling

Adding that in the US everything needs to be documented and there’s less relying on relationships, Besen says: “That’s one hurdle when Indian companies come to the US.”

Keeping everyone happy

For any M&A transaction, India-related or otherwise, true success is measured by the level of integration achieved. How will the target company be operated post-acquisition? To what extent will local management be empowered? How will employees be supervised from overseas?

Bharti’s integration plan relating to its purchase of Zain was plotted out in great detail through a transition council and the allotment of transition handholding time. Bharti also tried to underline its objectives in the initial stage of the deal.

Sampath says Bharti was aware there would be uncertainty when the acquisition was made, but it “managed to kill that very quickly”.

“We conveyed our commitment for the long term and our plans to look to the local community for leadership and management skills,” she adds. The company continues to employ some of Zain’s leaders and has recruited new talent from the African continent. It has also moved specialists with technical expertise from India to Africa.

Not all investments go this well. In 2007, the Singapore arm of Indian asset management company UTI inked a joint venture with Shinsei Bank of Japan. The venture was conceptualized in the warm aftermath of a good transaction the two entities had done together.

However, the 2008 financial crisis changed the complexion of Shinsei’s balance sheet. It forced the bank to restructure and eventually exit the joint venture. As the breakup was triggered by market stress and not a clash of interests, the two companies continue to maintain strong relations.

“In times of crisis, you retract, withdraw into your cocoon, re-examine your business, see what’s core and cut down everything else,” says Praveen Jagwani, CEO of UTI Funds in Singapore. “That’s a business cycle and everyone goes through that.”

Jagwani himself has lived through a few ups and downs with M&A situations including Standard Chartered’s acquisitions of Grindlays and Korea First Bank. He describes the first as “brutal” and the second as “a nightmare”. In the case of Grindlays, Jagwani recalls the painfully slow process of systems, policy and platform integration.

Despite best efforts some companies remain internally fragmented.

Jagwani cites Japanese bank Mizuho as an example, which he says is an amalgamation of at least 11 banks: “You meet some senior guys and they say ‘I’m actually from the Fuji part’ and another will say he is from the original Mizuho corporate bank. Everyone continues to this date to remember their original affiliation and institution they were a part of.”

Clear objectives and advanced consideration of post-closing integration issues at an early stage are needed to clear this hurdle. “Especially at the second tier, you want to make sure that not only do the sellers have confidence, but that management and the employees are on board,” says Besen.

“A lot of Indian companies I’ve seen are pretty good at letting the units they acquire be fairly independent and run autonomously,” he adds.

Justin Shmith Partner Blake Dawson

Jagwani believes that joint ventures and acquisitions sealed “with a warm fuzzy feeling of getting scale or joining a club of global accepted players” have little rationale and often break apart or at least encounter serious trouble.

Praveen Jagwani CEO UTI Funds (Singapore)

Referring to the Tata-Jaguar acquisition as a “pretty dumb idea”, for which it “borrowed heavily”, Jagwani asks: “What did Tata gain from that? [Tata’s acquisition of] Corus probably makes a lot of sense, but Jaguar was clearly a case of hubris.”

Top 40 India outbound M&A transactions