Ten cases where foreign M&As have destroyed wealth

Mumbai: To achieve scale, companies have to step outside and expand. But doing so may not necessarily add to shareholders’ wealth: India Inc has hardly been able to create value for its shareholders through its inorganic expansion abroad.

Most of India Inc’s big-ticket overseas acquisitions in the past five to seven years have, in fact, corroded wealth. The reasons for this range from high leverage taken to acquire a company, adverse changes in business cycle, or simply, failure to turn around a loss-making unit.

Tata Steel–Corus

Tata Steel acquired Corus, four times its size, for $12.04 billion in 2006. The valuation was more than one- and-a half times its initial offer and was paid mainly through debt.

Eight years down the line, Corus hasn't contributed much to Tata Steel’s earnings. The European business was loss-making till FY13 and has not yet shown strong signs of a turn around.

Hindalco–Novelis

Hindalco acquired Canadian company Novelis for $6 billion in 2007, making the combined entity the world's largest rolled-aluminium producer.

However, the high leverage, resulting from the acquisition and the slowdown in aluminium demand, post acquisition, have led to the company’s stock stagnating at the same level, adding nothing to its value.

United Spirits (USL) – Whyte & Mackay

USL had acquired UK-based Whyte & Mackay in 2007 for close to 540 million pounds with funds raised through foreign currency debt. USL, in turn, was acquired in November 2012 by Diageo, which had to sell Whyte & Mackay in May 2014 to avoid competition regulations in Europe.

The sale fetched 430 million pounds, much less than what USL had spent to acquire it. Diageo, thereby, reported Rs 4,321.6 crore as goodwill impairment in USL’s books for FY14. The stock has fallen by 18 per cent since April 2014.

Indian Hotels – Acquisitions

In the past five years, India’s largest hospitality company Indian Hotels’ consolidated operations have been impacted due to its loss-making international operations as the company has not been able to increase its average room rates of these properties.

For instance, the average room rate of the company’s property in Boston (Taj Boston) has been almost flat in the past one year ($272). Consequently, its consolidated losses have grown to Rs 523 crore from Rs 122 crore in the past five years ending FY14.

Tata Chemicals

Tata Chemicals' $1-billion acquisition of General Chemicals in 2008 to become the world's second largest soda ash player hasn't really brought much cheer to its shareholders so far, as the company's market capitalisation hasn't changed much since the acquisition in 2008.

The company suffered as its debt burden mounted with the steady depreciation of the rupee. In 2010, it also acquired British Salt for 93 million pounds, in addition to the acquisition of Rallis in India from other group companies. The company also took some write-downs in its overseas assets.

Renuka Sugars – Brazil Sugar Plants

Shree Renuka Sugars acquired two loss-making Brazilian sugar companies in FY10 in a debt-funded deal. The acquisition led to its debt bulging by more than five times by the end of FY12. The company was unable to turn around the units as global sugar prices remained subdued due to surplus production leading to lower realisations.

Besides, depreciation of the Brazilian real and the rupee meant higher interest outgo for dollar-denominated loans. To pare its debt, the company raised nearly $200 million by offering 27.5 per cent stake to Wilmar International.

Suzlon – REpower

Suzlon, the world’s fifth largest wind turbine maker, continued to face challenging times after the debt-funded acquisition of Senvion (formerly known as REpower) in 2007. At the same time, its debt-servicing ability hit a wall after global demand environment collapsed due to the financial crisis.

An increase in its working capital requirement and debt on account of REpower acquisition led to its total debt increasing to Rs 17,053 crore at the end of FY14 compared with Rs 5,164 crore in FY07.

Fortis Health– Acquisitions

Between 2010 and 2013, Fortis Healthcare expanded inorganically, venturing into regions like Australia, New Zealand, Hong Kong, Vietnam, Singapore and Canada. The acquisitions strained its finances and increased interest cost on the debt pile, hurting its bottom line. A change in strategy — shifting focus from global expansion to the domestic market — helped the company return to the black.

It deleveraged itself by selling most of the foreign assets and raising funds through preferential allotment and institutional placement offering. The stock of Fortis Healthcare jumped over 10 per cent on Monday on news of the company divesting its Singapore-based diagnostics business.

Pharma – Overseas Acquisitions

European acquisitions made by domestic pharma companies like Dr Reddy’s Labs acquiring German company Betapharm, and Wockhardt buying French firm Negma have yielded little for their shareholders. DRL had even listed its experience and learning from the Betapharm acquisition on its website.