Indian companies are on an acquisition spree!

Earlier I wrote about the Tata-Corus deal. Today let’s analyze the reasons behind the acquisition trend. A study conducted by Wharton School of Business points to a combination of factors-means, motive, confidence and opportunity.

Six-Sigma’s behind the acquisition trend

  1. Outsourcing : The outsourcing phenomenon, in which the western firms hired Indian companies for various call center and other work, has benefited the Indian managers the most. They not only became familiar with the western management practices but got the confidence that they can deal at a global level. It also demonstrated that India is a reliable source of low-price yet high-quality products and services.
  2. Capital inflow : With Indian economy booming, there is a large capital inflow in the market. Plus the Indian firms have become profitable.Most of them are underleveraged i.e. they have not much debt on them.Their ability to borrow money from market is very high.
  3. Risk-taking abilities improved : The corporates in India are now willing to take more risks unlike their predecessors. They now have the confidence that they can make it BIG!
  4. Government support : Regulatory changes made by the government are showing the results now. Recently Govt has announced that Indian firms can now raise money upto 200% of their capital value from external markets. (This liberalization era started way back in 1991 when Mr. Manmohan Singh was the Finance Minister)
  5. Pride factor : This is an equally important factor involved. (Every Indian knows what pride factor is during the India-Pakistan cricket match)
  6. Familiarity with western markets : Now the Indian firms know how the Western markets operate.Even the foreign investors now show faith in Indian management.

All these things have certainly fueled more confidence in the India Inc and now it’s ready to take on the world.

Indian companies are on an acquisition spree!

Yesterday I wrote about the Tata-Corus deal. Today let’s analyze the reasons behind the acquisition trend. A study conducted by Wharton School of Business points to a combination of factors-means, motive, confidence and opportunity.

Six-Sigma’s behind the acquisition trend

  1. Outsourcing : The outsourcing phenomenon, in which the western firms hired Indian companies for various call center and other work, has benefited the Indian managers the most. They not only became familiar with the western management practices but got the confidence that they can deal at a global level. It also demonstrated that India is a reliable source of low-price yet high-quality products and services.
  2. Capital inflow : With Indian economy booming, there is a large capital inflow in the market. Plus the Indian firms have become profitable.Most of them are underleveraged i.e. they have not much debt on them.Their ability to borrow money from market is very high.
  3. Risk-taking abilities improved : The corporates in India are now willing to take more risks unlike their predecessors. They now have the confidence that they can make it BIG!
  4. Government support : Regulatory changes made by the government are showing the results now. Recently Govt has announced that Indian firms can now raise money upto 200% of their capital value from external markets. (This liberalization era started way back in 1991 when Mr. Manmohan Singh was the Finance Minister)
  5. Pride factor : This is an equally important factor involved. (Every Indian knows what pride factor is during the India-Pakistan cricket match)
  6. Familiarity with western markets : Now the Indian firms know how the Western markets operate.Even the foreign investors now show faith in Indian management.

All these things have certainly fueled more confidence in the India Inc and now it’s ready to take on the world.

A difference of Rs 4….that’s all it takes to acquire Corus!

“If you were planning to buy a house two years back, it would have had a different price.But now when you buy it, you may pay a different price.It doesn’t mean that you are buying an overpriced house.That’s exactly what has happened to us..”.
That’s how Tata Group’s chairman Ratan Tata answers the speculation that the Corus deal is overpriced.

For $ 12 billion, Rs 54000 crore if you want, Tata Steel created a history when it acquired world’s 8th biggest steel-maker Corus.The price Tata steel paid was, in Indian terms, Rs 524 per share; Rs 4 more than CSN’s bid of 603 pence (Rs 520) per share.

Was the deal worth it? Wasn’t it overpriced?

What started as a $ 8 billion offer last October or 455 pence per share was sweetened nearly by 40% over the next 3 months.Further Corus’ margins are lower than world average at 10%(Tata Steel itself has about 40%). So the analysts are saying that the deal is quite overpriced. But perhaps Tatas know what they are paying for : from no. 56 in the world to gaining the 5th spot. Also Tata’s turnover is now Rs 1.5 L crore, much ahead of Mukesh Ambani’s Rs 89000 crore(a very large gap to fill in the near future).
Further looking at it from a different perspective, Mittal paid $ 720 per tonne of production for Arcelor, whereas Tata has paid $ 620 per tonne. So though the price is at the high end of the estimates, it is still a reasonable one.
Also Tata would now be in a position to produce cheaper automobiles & much else due to economies of scale in steel. Tata steel’s capacity has now tripled from 8.7 m tonne to 24m tonne and the deal gives Tatas access to high-value Europian market allowing it to ride on the back of a renowned brand.

How does China come into this?

With first Mittal-Arcelor and now Tata-Corus the market is now congealing into larger pieces …. at least that’s how it appears. The trade pundits are saying that this will result into hike in steel prices. But let’s look at this from a different perspective.
Worldwide steel production is about 1.3 billion tonnes a year now. The largest steel entity Mittal-Arcelor is only 10% of that. So overall sector is very fragmented. China is the largest steel making country in the world contributing nearly 33%. But largest steel company in China is still smaller than the new Tata entity.So the price volatility will remain but the effect won’t be that pronounced.

So whatever it is, Tata Steel has just carved a chunk of global steel industry for itself. India Inc is definitely shining!

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