Friday, October 17, 2014

Opinion: Indian companies global ambitions: Value hunting or walking into a trap?

Yesterday Economic Times reported that Tata Steel is in talks to sell its steel business units in Europe. (Link: This is the same company which bought European steel maker Corus for an astonishing figure of $8B in 2007. It was the biggest foreign acquisition by an Indian company then. Optimistic times make the risks look smaller. Neither Tata Steel nor any other businessmen expected the business cycle to top out that year and they did not know either that that steel industry was set for a multi-year down slide. It took time for Tata Steel to come out of its optimism and finally wrote off $1.6B in 2013. (Link: Now it finds that its European business unit is a drag on the company, so it wants to sell off some of the units there and reduce its foot print in Europe.

All the companies make mistakes and all businessmen get few things wrong. Ratan Tata has so many achievements in his life committed to Tata businesses; one Corus deal going wrong would never undermine his business judgments. But yet it was a billion dollar mistake. Had this mistake been done by any other Indian company, it would have been suicidal. Take the case of Suzlon. It acquired REpower, a German wind turbine maker in 2007. Suzlon thought it is a prized deal and financed the acquisition by borrowing extensively. Times changed. Suzlon could not withstand the debt load. A multi-bagger stock turned into a penny stock over the time. If Tata Steel was not a well-established, asset-backed, cash flow rich company, it would have struggled to service its debts.

This does not mean one should avoid going abroad with an open purse. Take the successful story of Jaguar-Land Rover (JLR) deal which is doing wonders for Tata Motors. But looking into the sales figures reveal that it is the rising sales of Land Rovers in China bringing good returns to the company. If JLR was a region-specific business, it would have become another blow to Tata group.

It is not that only Indian companies struggle outside their home country. Daiichi Sankyo, a Japanese pharma business group, had ambitious plans when it acquired Ranbaxy in India. It could not manage Ranbaxy and sold it off to another Indian company Sun Pharma but lost multi-billions in the transaction. Big ticket acquisitions always come with integration risks. If the acquiring firm does not have appetite for those risks, deal turns out to be a death trap.

So next time when we hear about an Indian company buying a distressed foreign company, it should not be viewed with pride but caution. It will not be a cake walk going global for all. The proud moment can bring a distress later too.