Acquisitions should be purposeful

MUMBAI: The rise of the Indian economy as a key global factor has been underscored best by the concomitant increase in merger and acquisition activity. Overseas multinationals are queuing up like never before to win a stake in the growth story of domestic companies, which in turn, have begun to display a new-found confidence to amalgamate companies abroad into their fold. As the story unfolds,

ET thought it fit to bring together a panel of experienced professionals and entrepreneurs to discuss the nuances of M&As. CA, Inc led by its president and CEO John Swainson, acted as the partner for the event organised under the ET Think Turf series.

Just ahead of the discussion, the panelists huddled together for an ice-breaking session. Mastek founder Ashank Desai; Ambuja group veteran; Ican Investment Advisors managing director Anil Singhvi, Standard Chartered Bank’s managing director for corporate advisory and finance Sunil Mehra; Larsen & Toubro operations head RN Mukhija, Videocon group chairman Venugopal Dhoot and ICICI Bank’s CFO and joint managing director Chanda Kochhar chatted with moderator Declan Gavin, partner, outbound tax advisory services at Ernst & Young to exchange notes and share experiences.

Setting the tone for an hour-long discussion, Mr Singhvi said acquisitions should not be undertaken for the fancy of the thing, but to achieve a well-defined strategic purpose. Growth for the sake of showing growth would be counterproductive. “Bigger mistakes are usually made during good times... So it is very essential that acquisitions have to be made carefully with a clear goal in mind,” he said.

Experts said that the buoyant Indian economy, extra cash with Indian corporates, favourable government policies and the new found dynamism among Indian entrepreneurs have all contributed to this increased acquisition trend. But they added a word of caution that acquisitions can also become “the winner’s curse”.

Mr Desai attributed the increased M&A activity to improved domestic demand, improved cash flows and liberalised regulatory environment in the country. “The large demand is fuelling more acquisitions among Indian companies as they now feel the need to have size and scale to serve this demand. Moreover, there is improved money from the private equity circles, therefore we are seeing larger deals like Tata-Corus taking place in the country,” he said.

This, however, should not lull an entrepreneur to believe acquisitions would be an easy street to glory. Integration of the buying company and the bought one, especially from a cultural viewpoint, could derail both the firms and do more harm than good. “Finally, it all boils down to whether you can digest the M&A,” Mr Mehra said.

L&T’s Mr Mukhija, citing his own company’s experience, said cultural differences don’t arise only in cross-border acquisitions, but even in domestic deals. L&T acquired a small operation in one city and moved it to another, only to find that the labour union at the latter facility resisted extending some facilities to the new workers, he said.

Videocon’s Mr Dhoot said chances of success would vastly improve if business leaders prepared in advance for M&A opportunities. For instance, at his own company, officials keep an eye out for companies that may come up for sale in the next few years and study them beforehand. Mr Dhoot said this put them at a competitive advantage when a typical 90-day auction window opens for an acquisition opportunity. “Acquisitions fail when people do not do their homework.”

Experts at the event also urged on maintaining high levels of integration processes after an acquisition. They said that nearly 50% of acquisitions fail to meet their desired objectives, and of this nearly 80% fail due to post-acquisition integration problems.

“Integration would not just mean blending the two operations totally, but bringing them together in areas where it would make sense and leaving the rest to remain independent,” Chanda Kochhar said. “The Indian corporate sector is at a stage where they can take independent decisions whether they merge the acquired company fully and take decisions on chopping and changing the management.”

With M&A deals worth nearly $50 billion taking place, it is clear that Indian companies have factored in these deals as a vital part of their growth strategy. But, “every acquisition is unique, and has to be approached uniquely, factoring in different aspects to marry them with your company”, concluded John Swainson, chief, CA.