These days when KPMG's Mumbai corporate finance head Rohit Kapur meets Indian chief executives, he finds a marked difference in the corner suite talk. Until recently, Indian bosses were still firming up their mergers-and-acquisition shopping itinerary. No longer. "Now they talk of rationalizing their business portfolio and monetizing assets to expand their core businesses," he says.
Until a few months ago, India's conglomerates had been scouring the world for M&A targets. Thanks to a long bull run in the Indian stock market and easy availability of finance, cash-flush companies were on an acquisition rampage (BusinessWeek.com, 5/15/08) from the U.S. to Australia, scooping up everything from cinemas to design houses to consumer-products companies. Indian companies spent $90 billion on M&A since 2007, according to Hong Kong research firm Dealogic. Among the most prominent was Reliance—Anil Dhirubhai Ambani Group (Reliance—ADAG), which invested $500 million in DreamWorks Studio in June and in the past two years made acquisitions ranging from cinemas in the U.S. to social networking sites in India.
But as the credit crunch deepens, Indian companies that shopped around the world are feeling the strain. Tata Motors (TTM), aluminum maker Hindalco, and turbine maker Suzlon Energy saw recent rights issues flop. Suzlon Energy withdrew a $360 million rights offering on Oct. 27, citing an adverse market response. The company also shelved plans to set up a tower manufacturing facility in India.
The companies had been raising the money to pay off loans for big-ticket global purchases. Tata Motors acquired Jaguar and Land Rover (BusinessWeek.com, 3/26/08) from Ford (F) in March for $2.3 billion. Sister company Tata Steel had acquired Anglo-Dutch steelmaker Corus for $12.1 billion in January 2007. Hindalco spent $6.3 billion for Atlanta aluminum rolled products maker Novelis early last year. Suzlon had been on a buying spree too, buying Belgium's Hansen Transmissions in 2006 and Germany's REPower Systems in May 2007 for $1.6 billion. Suzlon had been trying to raise $360 million to buy out the minority shareholders in REPower.
Now companies are struggling to come up with the cash to pay for these deals. India Inc. has $45 billion in foreign-currency borrowings used for expansion and acquisitions when rocketing stock valuations in the domestic market made external borrowing more appealing. But in today's tough financial environment, the buying sprees and expansion plans have come to haunt companies. The Indian market is down 54% since January, and many of the companies' shares have plunged below the prices offered by their rights issues.
"Over 80% of Indian companies' foreign-currency convertible bonds are under water, and nowhere close to conversion prices" says Devina Mehra, managing director of First Global Securities in Mumbai.
Companies that didn't follow through on deals are now counting their blessings. For instance, telecom operators Bharti Airtel and Reliance-ADAG, two ardent suitors (BusinessWeek.com, 5/27/08) that had been wooing South African telecom company MTN Group in May, must be relieved they didn't see the deals through. On Oct. 10, cash-rich Infosys Technologies (INFY) tamely gave up its hold on British consulting company Axon when local competitor HCL outbid it for $789 million, saving Infosys $719 million.
Scrambling to Renegotiate Deals
Hit by a credit squeeze at home, companies that succeeded in making deals are looking at alternate routes for financing. Tata Motors and Hindalco, for instance, are raising money by selling some family jewels and unlocking the cross-holdings within group companies. Tata Motors, which owns stakes in subsidiaries like Tata Daewoo and Tata Technologies, has said it would unravel some of its investments. Hindalco, which has a stake in mobile operator Idea Cellular, has said it also will unlock cross-holdings.
Suzlon, according to the company's chief operating officer, Sumant Sinha, is hopeful the company will be able to get bank financing. Like most central banks, the Reserve Bank of India has slashed banks' reserve requirements, lowered lending rates, eased curbs on external commercial borrowings, and asked domestic banks to spruce up their lending to boost the markets and economic activity. Although few banks are making loans to companies, "borrowing from the market should be more comfortable now," says Sinha.
Did India Inc. go overboard on M&As? "Many of the companies' decisions might have been right six months ago. Today it's a humbling experience for them, as nobody saw the crisis coming" says Rohit Kapur, corporate finance head of advisory firm KPMG India. However, others say India ignored the writing on the wall. Ashu Dutt, the Asia M&A head of Northbridge Capital, says the long bull run in India "spoiled" companies. "In a bull market, rational views get smothered by the easy availability of liquidity," he adds.
Companies that got into debt traps are now scrambling to renegotiate their deals and debts. Sterlite Industries, the Indian arm of Vedanta Resources, the London-listed metals corporation, won the $2.6 billion bid for bankrupt American copper miner Asarco in June. With copper prices tumbling since then, a Sterlite manager says the company is close to wrapping up the deal at a renegotiated price which is lower.
And there's plenty of renegotiating that'll happen now. The way out, say analysts, is simple: Keep your wallet shut. Indian companies need to reduce costs and become innovative in their product development, marketing, and operational costs, say analysts. But can they? Or will India's companies fumble and lose their way into global oblivion? Bankers have a solution: It's time for some serious business rationalization, says J.M. Financial's Kampani. "If Indian companies have global ambitions," he says, "then they better face and rough out the global crisis, too."
Lakshman covers India business for BusinessWeek