India's Global M&A Boom

Indian corporations, established at home and seeking new markets, are flush with cash and spending it abroad. But have they gone overboard?

By Nandini Lakshman

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Bharti Airtel, India's largest telecom player, is in the midst of talks to acquire a 51% stake in South African telecom major MTN in a deal that could be worth $20 billion. It's unclear whether Bharti's bid will succeed, but plenty of other Indian companies have been on a global shopping spree. On May 1, Essar Steel Holdings announced its third overseas acquisition in a year—the Nasdaq-listed Esmark (ESMK) for $1.1 billion. In March, Tata Motors (TTM) acquired Jaguar and Land Rover from Ford (F) (BusinessWeek.com, 3/26/08). And investment bankers say there are 10 more acquisitions by Indian companies in the pipeline over the next six months.

Why so much merger-and-acquisition activity from India? Thanks to a four-year bull run that yielded stock market returns of more than 40%, a strong rupee, and an easy availability of funds, the Indian corporate sector is flush with cash. In the last two years, corporate India spent over $40 billion on global M&As alone, according to research firm Grant Thornton, compared to $10.84 billion on domestic acquisitions. High interest rates and stock market valuations made local companies less attractive than international ones. In contrast, lower international interest rates made overseas acquisitions more appealing.

The durability of the M&A trend will face a test now, as the fallout from the economic slowdown in the U.S. hits India. The benchmark Sensex index is down 16% this year and the Indian currency has fallen almost 8%, factors that would seemingly make overseas deals less attractive. Still, many analysts and bankers in India say they're confident local companies will continue their global M&A march. The marginal weakening of the rupee will not impact outbound M&As, they say, as U.S. and European assets are still cheap, at one-to-two times multiples compared to three-to-four times multiples earlier.

Moreover, many of the acquisitions so far have fit in nicely with Indian companies' new global strategies. "The early deals have been well received, showing an overall increase in corporate confidence," says Amrit Singh, head of M&A at Deutsche Bank (DB) in India.

Tata Leads the Charge

The acquisitions have been both big and small, across different sectors, some bargains and some trophy deals. Most active has been the Tata Group, the $50 billion private-sector conglomerate. Since January, 2006, Tata has spent a total of $18.75 billion on acquisitions. In keeping with the pattern, local buys were small, numbering just three—a bottler of mineral water, a maker of processed foods, and an operator of pig-iron furnaces—for $225 million. The big bucks were saved for the global plays—21 of them for $18.52 billion, including Tata Steel's Corus for $12.1 billion, and Tata Motors' $2.3 billion spend for Jaguar and Land Rover. Tata has also done smaller overseas deals, such as the acquisition of a coal project in Mozambique for $84 million.