In January 2007, when Tata Steel acquired UK steel giant Corus for $12.2 billion, the transaction heralded India Inc.’s largest ever outbound buyout. The pundits were quick to also label the Tata-Corus deal—and subsequent multi-billion capers such as Hindalco-Novelis, Tata Motors-Jaguar Land Rover and Suzlon-REpower—as a surefire sign that Indian business was finally ready to take on the world.
The pundits weren’t wrong. Making acquisitions for size and scale, amongst other objectives like new markets and new products, isn’t a bad reason to plant your flag in outposts across the globe. The only problem: Big acquisitions take longer to digest—and the process gets even more difficult when global economies slip into a downturn. Suddenly, these overseas conquests appear like reckless adventures, as demand conditions turn soft and debt suddenly jumps out of the books to rudely remind promoters of the perils of putting cash where often the investment bankers’ mouth was.
Now cut to a company like the over Rs 3,500-crore agrochemicals firm United Phosphorus Ltd (UPL). It hasn’t made any billion-dollar deals, but the 26 acquisitions (including products) it has pulled off since 1994—a decade in which going global was considered extreme rather than the norm— would easily cross that number. UPL is unlikely to figure in consultants’ case studies of bigbang acquisitions. But consider what UPL has achieved: A global footprint that covers 23 countries (which in turn allows it to address customers in 86 countries), a broad range of operations that includes agrochemicals, seeds and biotechnology and significant entry barriers in countries that it has entered. And yes, most of its buyouts are working well. Reason? UPL doesn’t wait for more than three years for them to yield results. They usually do.
Like UPL, a host of Indian companies have over the years made sub-billion-dollar acquisitions that have begun yielding benefits that go beyond size and scale. A few have found assured supplies of raw materials, some have been able to lay their hands on high-end talent, and others have been able to ride on new opportunities that would have taken years to start from scratch.
Many of these companies operating in niche areas have gone on to become world leaders in their respective areas via the buyout route. Rain Commodities, for instance, has become the world’s largest maker of calcined petroleum coke, a raw material that’s needed to make aluminium and titanium dioxide.
The companies BT has looked at have made acquisitions in the $10 million-$600 million range. The smaller ticket sizes have ensured that they haven’t burnt holes in their balance sheets. However, many of these firms have used foreign currency convertible bonds (FCCBs) to fund their buyouts and a few of them will be challenged at conversion time if the stock markets continue to stay bearish.
Yet, there’s little doubt that most of our mini-champs are on the right track. BT profiles 10 of them. The lesson to be learnt is clear-cut: Small can be beautiful—and often works better, too.
For small acquisitions: It’s not just about gaining size and scale.
Global footprint:T his doesn’t involve setting up countless outposts the world over. Binani Cement, for instance, by acquiring just two strategicall ylocated units, can address a fair share of the globe.
New opportunities: By acquiring in the US, pharma packaging firm Bilcare has hit upon a $21-billion market—that’s the value of counterfeit drugs sold in the US.
Broadbase operations: United Phosphorus’ buyout of Dutch seed maker Advanta was triggered by the impact of biotechnology on the agrochemicals sector.
Cost arbitrage: Allied Digital acquired a remote infrastructure management firm in the US, with the plan of offshoring projects to India, where professionals are available at a fifth of the price in the US.
Find raw material sources: Rain Commodities has found an assured supply of anode-grade petroleum coke after buying out CII Carbon in the US.
Access high-end talent: By acquiring companies in the geospatial information sector, Rolta has been able to integrate 400 top-notch consultants from the international firms into its stable.