India today is a key emerging global market with indications of a bright future. It is the worlds largest democracy, the fourth largest economy in terms of purchasing power parity and the tenth most industrialised country in the world. An oft-cited report by Goldman Sachs projects that the Indian economy will become the third largest in the world by 2032 and this appears to be on course given that GDP growth in excess of 9% during 2006 and 2007 helped India establish itself as the world’s second fastest growing economy. But due to COVID this has reduced significantly
What impact has the global downturn had on such growth?Despite the slowdown, the Indian economy grew 7.5% in 2008 and is expected to grow by over 6% in 2009 – commendable when compared with most other global economies, which in the face of the domestic and global liquidity crunch have had trouble staying afloat. India’s continuing success has been attributed to various reasons, including a high domestic savings rate, the large domestic market and the cautious response by the Indian corporate sector (often referred to as “India Inc.”) to the liquidity crisis, i.e. shrewd use of key resources like cash and management bandwidth with appropriate focus on cost rationalisation. This has obviously not gone unnoticed with the global investors. As soon as the global markets started rallying earlier this year, strong Foreign Institutional Investor (FII) inflows returned to the Indian markets. Confidence is such that initial public offerings (IPOs) too are back in favour after a wash out for most of 2008 and the first quarter of 2009.
How has the rally in the financial markets impacted the “real” economy? It appears to have been rather complementary, given that the index of industrial production recorded a 10.4% year on year gain over its value in August 2008, as compared to a 6.8% year on year gain in July. The services sector has grown over 8% compared to the previous quarter and there is similar good news in the construction and mining segments. The government’s stimulus package has also helped raise sentiment and in spite of a non-too-great monsoon year, the Indian economy seems set to record one of the higher growth rates internationally.With plentiful liquidity in the domestic banking sector, India Inc.’s appetite for M&A activity is likely to re-ignite, especially in light of falling valuations of a large number of European companies and attractive opportunities represented by distressed asset acquisitions. While the imperatives for India Inc. in making outbound (overseas) acquisitions remain the same, i.e. acquisition of customers, brands, technology and geographical reach, the landscape has changed compared to the previous splurge of outbound investment by Indian companies.
Unlike the 2005–2008 period, when a number of Indian businesses ventured out for the first time, most Indian companies are now more experienced in dealing with international M&A markets and are more confident in dealing with western vendors and their advisors.Over the years, the UK has been one of India’s larger investors, accounting for approximately £9bn of inbound M&A activity in India between 2005-2008. However, in recent times Indian investment into the UK has also risen significantly. In fact, the most significant and groundbreaking outbound deals from India have been made in the UK. The Tata Group is one of the largest foreign investors in the UK, having spent approximately £8bn in acquiring Corus, Jaguar/Land Rover and Tetley, to name a few.
Many other Indian companies have shown a keen interest in acquiring British companies as they are perceived to be at the heart of European commerce and industry. Moreover Indian companies coming to Europe prefer to operate from London, which is seen as the gateway to the oil-rich Middle East and the commodities-rich African markets. Other significant recent acquisitions made by India Inc. in the UK include the ONGC’s $2.8bn purchase of Imperial Energy and United Spirits’ $1.1bn takeover of Whyte & Mackay. The reach of Indian investment overseas is wider than just the UK with significant acquisitions in the US, Continental Europe and the South East Asian markets. Even in the recent times, when M and A activity has been slow (due principally to a dearth in the availability of financing), Indian businesses have been active in acquiring distressed assets abroad.
In light of the willingness of Indian companies to invest outside of the Asian subcontinent in the last four years, and their ability to acquire distressed assets in recent times, Indian companies are now considered as serious contenders for acquiring global businesses. Both western vendors and advisors are actively reaching out to them to discuss potential global divestitures. This transformation has been aided by the reasonably good track record of Indian companies in integrating overseas acquisitions, an enabling regulatory environment and enhancement of transparency in Indian financial reporting. This has provided western vendors with comfort with regard to the ability of Indian businesses to finance, manage and integrate acquired businesses with assurance from the outset.That said, outbound M&A always come with its own set of unique challenges.
The recent PwC Global CEO survey (see diagram) highlights, among other things, cultural issues, fully understanding the financial position of the acquisition and setting a reasonable expectation on the return on investment as key areas and India companies would do well to learn from them.Apart from this, there is an argument that some Indian companies have been overpaying for overseas assets in their exuberance. This is something that most Indian companies that have made overseas acquisitions would have to deal with. If this hurdle is successfully negotiated, as appears to be the case so far, it would add to their credibility and help them come of age on the global platform.
A significant opportunity beckons for India Inc. in the global markets – their prudence in difficult times over the last few months, the growing acceptance of Indian buyers and reform-friendly political stability have created the appropriate platform for them to be significant players in the next wave of global M&A. The behaviour of the Indian diaspora is also a crucial factor in this process, with a key role played by Indian-owned businesses and foreign-born Indians in the UK, Canada, the US and southern and eastern Africa.
A recent report claimed that Asian business contributes around ten percent of the UK’s GDP. The strong links between the expatriate Asian communities and the Asian subcontinent are providing welcome opportunities for Indian businesses to develop a presence in markets in western economies such as the UK and US, and vice-versa. Furthermore, foreign-born Indians and Indian-owned businesses can help to bridge the cultural gap and help businesses from the subcontinent to