"M and As turn sour for India Inc"

The tide seems to be turning for corporate India on the overseas acquisition front.

After a string of foreign deals in the last few years, including Tata Motors' purchase of Land Rover and Jaguar brands from Ford for $2.3 billion this year, attempts by Indian companies to acquire assets abroad are increasingly hitting roadblocks. At least, the recent attempts by Indian companies suggest so.

Be that of Essar Steel's attempts to buy US steel firm Esmark for $1.2 billion (over Rs 4,500 crore), Sun Pharmaceutical's onging bid for Israeli firm Taro Pharmaceutical or Sterlite Industries' bid for Asarco's mining assets, the overtures by Indian companies have failed to hit the target.

Last week, Taro withdrew from its $454-million merger agreement with Sun, citing differences on pricing and the financial turnaround Taro achieved since last year. In the case of Sterlite, the former parent of Asarco, Grupo Mexico, has submitted a bid for the company's assets after the Indian company was shortlisted as the preferred bidder.

"The deals are being done in mature markets, where firms have to deal with the law of the land, bankruptcy process, unions, or aggressive bidders. It is upsetting when there's a counter-offer at a later stage like Grupo Mexico's bid for Asarco,'' said Sanjeev Kishan, director, PricewaterhouseCoopers.

Unlike in India, where a buyer can deal with a promoter having significant stake, the target companies in the West are widely-held and board-driven companies.

The board of directors have to ensure the best deal for the shareholders, and hence, insist on a "fiduciary out" clause in deals, which says that if the market conditions change (turnaround/if someone offers a higher price), it has the right of the company to back out.

"Until a deal is done and you have paid-off the shareholders, it is not done. Some of these deals have run into this problem," said Raj Balakrishnan, director, Merrill Lynch.

Though Essar's bid had the support of Esmark's management, the US steel company had to back Russian company Severstal's bid, which was higher than Essar's by just 25 cents per share and had the support of the workers' unions.

Essar, which revised its offer for Esmark upwards from $17 to $19 per share after the Russian steel-maker jumped the fray, didn't want to stretch it beyond a price.

"Given the macro-economic situation, it didn't want to go beyond a price. Its room beyond $19 was limited,'' said a banker. "It's a sign of maturity; that companies are not letting their ego drive them into a bidding war,'' said Balakrishnan, which brings us to a key question: are Indian companies being less aggressive on pricing their overseas targets?

"Companies are choosing to maintain liquidity; the aggression has plateaued,'' said Gaurav Khungar, executive director, (corporate finance), KPMG, a consulting firm.

"The cost of funding has gone up, which means a greater value is going to the lenders and lesser to equity,'' added Merrill Lynch's Balakrishnan.

The 39-per cent fall in the stock markets since January 9 this year and the fall in stock values of Indian companies has affected their leverage and ability to fund M&As. Unlike in India, where lending is collateral-based, internationally debt is given on the back of a company's market-capitalisation.

Take an Indian firm, which was trading at 10 times its earnings before interest, taxes, depreciation and amortization (EBITDA) six months back and acquired a company in the US, which was trading at four times its EBITDA. The Indian company, which will consolidate the accounts of the acquired firm into its balance-sheet, will hope that its stock trades at 8-10 times its EBITDA.

"With the fall in stock market and the value of the stock, this arbitrage opportunity is reducing, said KPMG's Khungar, adding "trading multiples have come down, which has taken the aggression out. The capability to finance has come down.''

"Given the overall economic situation, Indian firms will be more selective (with acquisitions abroad). The cost of funding has gone up while the availability of funds has become limited. This impacts their ability to do a transaction,'' said Sudip Rungta, head, M&A (hydrocarbons and technology), Essar Group.

Bankers say that Indian firms are better-off as they are part of large groups. Take the deals that some of the Tata group companies have done. "If the individual companies were to do these deals, it would have been difficult for them. Lenders take comfort from the group,'' said a banker.

Analysts say Indian companies are facing opposition in certain sectors or assets that a country considers strategic. "Deals are still happening in IT; there are no issues. When it comes to a large strategic asset, you may face a challenge,'' said Essar's Rungta.

At the crossroads

Indian companies' acquisition attempts are being opposed by unions, aggressive rivals, former parent or targets
Fall in the stock values of Indian companies has affected their leverage and ability to fund M&As
Experts say fear of Indian companies playing the outsourcing card to produce goods cheaper at home may stall acquisitions
Indian companies will have to be more selective with acquisitions abroad