India Inc turns cautious on overseas M&As

The fairy tale corporate marriages are passe.

Tata Steel's decision to sell off Corus, acquired a decade back, has brought curtains down on the adventurous and audacious global trip embarked by India Inc.

Several mergers and acquisitions (M&As), particularly of the variety where an Indian entity took control of a foreign player of some respectable size, and in the process grabbed headlines, are now staring at an uncertain future.

Of course, not all global deals by Indian corporate groups have ended up in fire sale. Tata group's another and equally significant acquisition of Jaguar-Land Rover being a prime example of helping Tata Motors as the latter went through a tough phase with a disastrous drop in domestic sales.

"Nearly a decade ago, India Inc was going all-out and purchasing big companies abroad despite their higher price tags. The booming stock markets in India gave a big push to them. But unfortunately the markets have become muted since then," said a Mumbai-based consultant, who is an expert on distressed assets.

Reasons for their lack of performance are varied. It could be excess leveraging like in case of Suzlon's takeover of REPower, unrealistic assumption of benefits from acquisition like Airtel's Zain Telecom deal or the assorted problems that came with picking a bad apple even if it's a global market leader like Novelis, acquired in the $5.9 billion deal by Aditya Birla Group's flagship Hindalco in February 2007.

Or it could be just bad luck as the commodity prices dropped nearly dead, breaking several barriers.

Grown up watching movies like ET, Jaws and Schindler's List, Anil Ambani was all smiles walking down the red carpet along with Stephen Spielberg in 2008 when his group and DreamWorks agreed to make six films a year for the next six years under a $1.5 billion deal.

Unfortunately Spielberg, who in 1993 directed Jurassic Park, one of the highest grosser of all times, couldn't come up with a similar blockbuster and Ambani in 2012 scaled down the initial target by half.

Take the example of Novelis deal.

On paper, Kumar Mangalam Birla's bid to give Hindalco a global scale made perfect sense when in 2007 he acquired a leader in downstream rolled products with presence in 11 countries.

While the all-cash deal happened at a huge premium, Novelis came with a debt in its books worth $2.4 billion on a net worth of $322 million, which meant a steep debt-equity ratio of 7:1.

Add to it, the history of poor corporate governance and wrong business decisions, when the earlier management got locked into fixed sale price incurring huge losses at a time of volatile aluminium prices, turned the acquisition rather costly for Birla.

The Suzlon-RE Power deal was a typical instance of biting off more than one can chew. Acquiring an European leader in wind turbine made much sense for Suzlon giving it wider geographical presence and product portfolio. But the deal also led to Suzlon turning a Rs 14,000-crore burden on the banking system.

Suzlon then defaulted on redeeming foreign currency convertible bonds and stock plunged on the market leading to enormous erosion of shareholders' wealth.

So, what's the way forward for India Inc?

"Those heady days of big-ticket acquisitions are gone. At present, there are several discounted deals happening in the international market, and there are plenty of foreign companies available for pick. But Indian companies are extremely cautious. Both the number of deals and the deal size have dropped drastically," Ashutosh Maheshvari, chief executive officer at Motilal Oswal Investment Advisors, who managed several high profile M&A cases in the past, told dna.

Following the global economic meltdown, many small, mostly family run enterprises, went out of business in Europe, and the their governments, through court-appointed administrators, tried to sell them off to foreign investors.

With Cyrus Mistry taking just a dollar from Tata Steel's deal with Greybull for the Scunthorpe plant, is it the payback time for India?