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Brocair Partners Interviewed in Acquisitions Monthly Magazine

Indians Go Global, 1 May, 2008

Indian companies are gaining ever-greater confidence to flex their substantial financial muscle on the world stage, writes Christopher Spink.

The Indian economy has passed a critical stage over the past two years, firmly establishing itself on an equal footing with its former masters in the West.

No longer is the sub-continent considered merely a useful source of cheaper labour for more developed economies. Now the tiger is biting back, challenging those that outsource this work and even acquiring such companies.

Since the start of last year, the value of acquisitions by Indian companies of overseas businesses, at US$28.3bn, has outstripped the value of purely domestic deals by more than 50%.

Larger acquisitions dominate this crop, including such landmark deals as Hindalco’s US$5.8bn purchase of US aluminium group Novelis and Ford’s recent US$2.3bn sale of Jaguar and Land Rover to Tata Motors.

Some of the UK’s most sacred items have also been taken East, such as Scottish whisky group Whyte & Mackay, acquired by Kingfisher beer entrepreneur Vijay Mallya for US$1.18bn. Even English cricket is under threat by the lucrative Indian Premier League.

"2007 was a turning point. There have been a number of bigger ticket transactions," says Ralph Voltmer, a partner at US law firm Covington Burling, which has advised telecom-focused conglomerate Reliance. "Many large Indian companies are truly multinational now. I expect this trend to continue," he says.

The acquisitions of such trophy assets inevitably grab the limelight, drawing attention away from the more prosaic deals that have happened over the past 18 months. There have been 369 in all, which is still half the number of domestic deals. Ian Gomes of KPMG says there are "scores of deals in the US$50m to US$60m range".

"Over the last four years there have been lots of smaller deals, where Indian companies have bought overseas, but these have slowly been getting larger," says Ian Scott, a partner at lawyer Ashurst, which has had an office in India for 14 years.

Andy Currie, managing director of Catalyst, has noticed a distinct rise in interest from Indian potential purchasers of UK assets, saying: "Five years ago, we had no Indian interest when running disposal mandates, but now 80% of such deals will have interest from India."

The UK mid-market adviser is part of cross-border network Mergers Alliance, whose Indian member Singhi recently organised a conference in Delhi attended by more than 300 Indian corporates, keen to learn about doing overseas acquisitions.

"A third of Indian money invested overseas goes into the UK," says Currie, citing the cultural links through the Empire and the English language as important reasons for this. He has sold building product, construction and IT businesses to Indian buyers.

Drugs seeking targets

One of Singhi’s bigger deals this year involved advising an Indian pharmaceutical client, Plethico, on the acquisition of Natrol, a US herbal medicine maker.

"We were brought in to find targets for Plethico to buy outside India," says Abhijeet Biswas, head of Singhi’s dedicated cross-border M&A team.

"Plethico’s strategy is quite different from that of Ranbaxy or other Indian makers of generic drugs, who make products under license from Western companies. As a maker of herbal medicines, Plethico already had exports into unregulated markets such as CIS countries, the Gulf and South East Asia. Now it wanted to move into regulated markets.

"Herbal treatments are popular in the US and Germany, so these were the places where we drew up a good set of targets," says Biswas. "Plethico decided to target the US first as it was a much bigger market, then other smaller ones. We then approached Merger Alliance’s US partner Brocair, which is a healthcare specialist.

"The search was then narrowed down to Natrol, as it was a Nasdaq company, principally owned by institutions that were willing to sell. This made it easier to acquire than a herbal business that was privately owned or part of a larger corporation. Natrol is a top 10 business in the US and a good platform for future growth," he says

"This was very much a stepping stone. Indian pharma companies want to get into the US in order to gain FDA approval for their processes. This will take a lot of time to do from a standing start, so acquiring an existing approved facility makes sense."

This trend is continuing. Jubilant Organosys, which bought two US research businesses, Target Research Associates and Trinity Laboratories, in 2005, acquired Hollister-Stier Laboratories for US$122.5m a year ago. And last month it announced plans to buy Draxis Health of Canada for US$255m. This enhances its presence in regulated markets.

Rusty Ray at Brocair, Singhi’s US partner firm, notes that Indian pharma companies are also looking to buy US developers of drugs, rather than just established products, saying: "Major Indian companies are definitely interested in buying US pharmaceutical companies in the development space."

Ranbaxy, best known for making copies of off-patent drugs developed in the West, is spinning off its development arm this summer and smaller rivals, such as Wockhardt, are also expanding in this field.

A year ago, Wockhardt bought French developer Negma Laboratories for US$265m. Negma has 172 patents connected to drugs in development. Wockhardt has now made five European acquisitions.

Vineet Aneja is a partner in the largest Indian law firm by number of lawyers, Fox Mandal Little. "We remain busy with Indian companies still looking overseas, principally at the US and Europe," he says.

Aneja still sees the drive for many of these deals as the opportunity to relocate the manufacturing facilities acquired in the West back to lower-cost India. Others detect a trend away from this motive.

"The high profile Tata acquisition of Jaguar and Land Rover had nothing to do with buying IT and technology. It was a traditional M&A deal driven by the desire to invest in the global market place," says Nikhil Mehta, partner at Cleary Gottlieb Steen & Hamilton.

The firm knows about this dynamic, as it advised Mittal on the takeover of Arcelor. Steel and materials continues to be an extremely active sector. Mehta again emphasises that the recent deals have been done to give Indian companies and their products access to a global market place, saying: "Tata already had lots of expertise when it bought Corus".

IT issues

Ian Gomes of KPMG reckons there are several reasons why Indian companies want to make acquisitions overseas. "They either want a Western brand name to use globally; access to an established distribution network throughout Europe and the US; or are looking to acquire hi tech design or intellectual property," he says.

Gomes highlights the pharmaceutical, automotive and IT sectors as being particularly active. Some of the dominant Indian companies in the latter area, such as Infosys, Wipro, Satyam and Tata Computer Systems have long been linked with possible targets in Western Europe and the US, such as SAP and Cap Gemini.

However, Anthony Miller, a partner at Arete Research who has long tracked the fortunes of these companies, notes that shareholders have become disenchanted with how they have integrated purchases already made in the West. Their share prices have all fallen over the past two years, even though their revenues have on average doubled.

This is partly because investors already link these stocks inextricably with the US and EU economies, as most of their income is received from companies in these developed markets deciding to send IT contracts offshore. A fear that a downturn in the US economy will dampen such activity seems to have gripped these investors.

Wipro chairman Azim Premji said last month: "The global economic outlook has changed significantly since the beginning of this calendar year. It poses challenges and at the same time, opens up new opportunities. Given the uncertainty in the environment, we remain cautious but resilient."

KPMG’s Gomes disagrees. "Yes, all IT companies have been affected by the US downturn hitting top-line growth. However, that’s a short-term issue. Many US operators are also going to be urged to cut costs, so more offshoring to India may take place in the long term." Another issue has been the increasing labour costs these IT giants face.

Arete’s Miller notes that some of the deals that saw Western companies buy Indian ones in the last two years appear to have turned sour, citing Cap Gemini’s US$1.25bn purchase of Kanbay in October 2006 and EDS’s US$380m purchase of Mphasis in June the same year.

Both have since seen many Indian IT consultants leave, after seeing the disparity in pay between themselves and colleagues in developed economies. The deals have effectively been regarded as reverse takeovers internally. This is making Indian companies wary about buying in countries where labour costs are higher.

However, some continue to make moves overseas. Most notably, last August Wipro bought Nasdaq-listed Infocrossing for US$673m, nearly three times its annual revenues. Infocrossing stores data for US clients, notably in the healthcare sector, on servers at five remote locations in the US.

The logic behind this deal was reasonably traditional. Wipro president Suresh Vaswani said: "This acquisition of an acknowledged industry leader broadens the data centre and mainframe capabilities of Wipro Technologies to uniquely position us in the remote infrastructure management space."

Satyam’s acquisition of Bridge Strategy Group in January for US$35m was much smaller but highly significant, says Arete’s Miller, as Bridge is a high-end management consultant rather than a provider of commodity IT services.

This means Bridge is definably different from Satyam, making integration less of a problem. The hope is that Bridge’s 36 fee earners could generate offshore contracts too through their contact with senior management in US companies.

Financial forays

Religare, a financial services group majority owned by pharmaceutical giant Ranbaxy, has also established a bridgehead in the West, through its recently announced acquisition of Hichens, Harrison for £55.5m. Hichens is an AIM-listed stockbroker specialising in advising and raising money for businesses on London’s junior market.

Hichens finance director Brian Rowbotham believes the deal will provide benefits for both parties, saying: "We have expanded in the emerging markets lately, trying to become broker of choice for mid-market companies seeking a listing in London. Religare has over 500,000 clients, many of whom have businesses that could seek a listing."

Andrew Perkin of PricewaterhouseCoopers advised Religare on the deal. "Large Indian companies are becoming acquisitive outside India," he says. "Smaller ones are equally interested in expanding beyond their domestic borders, but many are beneath the radar of the larger investment banks and commercial banks."

He says this was the first of several acquisitions planned for Religare, previously a tax and audit client of PwC. "They have been active in Australia but are also keen to buy in the US," he says. "Religare has ambitions to be a global company."

Some have accused Religare of paying over the odds for Hichens but Perkin says: "Religare is not bothered. This is a long term play for the business." Indeed, an AIM brokerage seems worth paying for, judging by recent activity from the sub-continent.

Robert Ogilvy-Watson, a partner at Ashurst, says: "Lots of Indian companies are floating in London via the Isle of Man." One London listed Indian company is Vedanta Resources, which has made the most of its quote to buy a 79% stake in a Zambian copper miner Konkola for US$700m.

There have been some setbacks for Indian acquirers of foreign assets. Last year, Suzlon bought a majority stake in German wind power group ReEnergy for US$1.7bn in a complicated two-stage process.

Suzlon is one of the world’s biggest makers of wind turbine blades and is hoping to take advantage of the move to greener forms of power generation. However, the group is facing manufacturing quality problems at present, having recalled most of its blades sold in the US.

It is also having problems securing access to ReEnergy’s product designs, according to reports. This is because technically it only holds a minority stake in the German group, as two major shareholders, while already ceding votes, have yet to transfer their equity to Suzlon.

The acquisition of Jaguar and Land Rover from Ford could also prove a challenge to Tata in the current environment. The two UK marques employ 16,000 and Tata might be looking to reduce costs, particularly as it had to take out a US$3bn bridge loan to finance the acquisition. As part of the deal Ford paid US$600m into the brands’ pension schemes.

That said, there were fears about Tata’s financing of its Corus purchase, which proved unfounded, notes Ashurst’s Scott. "The refinancing of the Tata Corus deal has been tricky to get away but it hasn’t stopped the company from buying Jaguar and Land Rover," he says.

Speaking of the current financial climate, Scott adds: "Our Indian office is as busy as ever but some deals have fallen over. However, I am not expecting a huge slowdown in M&A deals. Smart money will back places where fast growth will be."

KPMG’s Gomes is equally positive, because of the strong relationships Indian corporates have with their clients. "Indian banks know their acquirers well and so are happy to help them. Many of these banks, such as ICICI, now have London offices," he says. "They can price risk more appropriately for Indian acquirers."

Singhi’s Biswas agrees, saying: "The impact of the sub-prime crisis is limited. Not many Indian banks are affected. It has certainly slowed down the process of doing M&A but it has not stopped. I have seen one deal shelved recently. But if you find the right company you can still conclude the transaction."

At present, Indian acquirers are remaining positive.