Offshore M&A: Could Indian buyers set the standard?

The wave of international mergers and acquisitions has continued unabated, however, a new trend may be emerging: the Indian buyer as the preferred international acquirer.

Internationally, private equity funds abound. There are over 200 funds with assets in excess of US$1 billion. These funds have developed a divergent reputation: for some as saviours, for others, as greedy pirates. They are actively competing in most of the international deals in the US, Europe and Asia.

Private equity downfalls

The US House of Representatives, in a subcommittee hearing on private equity last September, was told the tale of Hastings Manufacturing Co, a Michigan auto parts supplier. Facing economic pressures the company negotiated significant wage and benefit concessions from its unionized workforce. It was not enough. The firm filed for bankruptcy and was taken over by a private equity fund. The new owners cut health benefits further, altered working conditions and decimated retiree benefits. The claim was made that value was created, however, not by better management or business innovation, rather by extracting it from the employees and retirees.

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Healthy companies have also been targets. The critics of private equity point to the practice of over-leveraging the target, issuing large dividends to the acquirer (in some cases as much as the investment), laying off workers, destroying unions, closing factories, selling assets, cutting health care and pensions, and eliminating research and development.

The general fear in the US is that an acquisition by an Indian company would present all of the issues of the private equity acquirer, plus more. The target would potentially suffer the offshoring of manufacturing, and the replacement of management with Indian managers who are unfamiliar with US business culture and US customers. Furthermore, the firm would endure a stripping of technology. These fears appear to be unfounded, however, as a review of a number of Indian acquisitions in practice demonstrates.

Knowledge management

Wipro Technologies has recently spent over US$1 billion in offshore acquisitions. It has shown a propensity to view the acquired company as a source of talent and information to enhance its business. Wipro took over American Management Systems in 2001. Instead of replacing management, after a few years, managers were given larger portions of the Wipro business to run.

Essar Global took over Canada’s Algoma Steel in a US$1.7 billion transaction. Instead of offshoring the Canadian jobs, Essar used the company’s managerial talent to improve its overall international business.
Tata Group, one of India’s most prolific acquirers, has personified this “Desi-style” of acquisition. In 2000, Tata launched the international wave of Indian trophy takeovers with its acquisition of Tetley Tea. Rather than cutting out senior management and directors, no senior manager or director has been asked to resign since Tata took over the company. Instead, Tata Tea sent its Indian managers, responsible for the domestic tea business, to Tetley to learn global branding. Instead of pulling money out, either through placing debt or special dividends, Tata poured money in, allowing Tetley to make its own acquisitions.

Tata handled its acquisition of the Dutch steel company Corus, worth over US$11 billion, in a similar manner. Management stayed, as did the employees.

Forthcoming acquisitions

The news for 2008 is the acquisition by Tata of the trophy brands of Jaguar and Land Rover from Ford. There was considerable interest in these venerable brands from a number of players, most notably the private equity funds. But, as the Wall Street Journal reported, behind the scenes it was Tata’s reputation from its previous acquisitions that helped close the deal. In addition to the 16,000 direct employees, it is estimated an additional 40,000 supplier employees depend on Jaguar and Land Rover.

Legitimate worker concerns were raised concerning outsourcing components to Asia by an acquirer like Tata Motors, versus claims of private equity buyers that they would limit layoffs. In the end, the unions supported Tata, based upon the company’s previous performances.

Bharat Forge is developing a similar reputation of taking over companies, without breaking them up.

All of this bodes well for a continued surge of Indo-US merger and acquisition activity. If Indian companies continue on their current path, which will be a challenge if the global economy heads into recession, it is quite possible that Indian companies will become the “acquirer of choice” in the fast paced global mergers and acquisitions market.

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Wayne Rogers is a senior adviser in the international law firm of Sonnenschein Nath & Rosenthal, where he specializes in international trade and cross-border transactions. He may be reached at +1-202-408-6478 or wrogers@sonnenschein.com.