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India's success story in global buyouts

By Bhupesh Bhandari in New Delhi
November 06, 2006 10:06 IST
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The carillon is as far removed from India as the igloo. The musical instrument, composed of at least 23 cup-shaped bells played from a baton keyboard using fists and feet, has its origins in the Low Countries of the 15th century when it was mounted on churches as a token of civic pride and status.

But on this pleasant October afternoon, it was the Indian national anthem that Jo Haazen, the foremost carillonneur in the world, was playing at the town square of Mechelen, a small town halfway between Antwerp and Brussels. The mayor had thrown a reception for Gautam Thapar for saving the jobs of thousands in the town; Haazen and hundreds of others were expressing their gratitude.

In 2004, Thapar's Crompton Greaves had acquired the Pauwels Group for Euro 28 million. Its mother plant at Mechelen (it has four others around the globe) had about 1,300 locals on its rolls and provided indirect employment to at least another 7,000 in the town. These people faced a bleak future with the company in financial distress and on the verge of closure - it had reported a loss on a turnover of Euro 245 million in 2004.

Two years later, Pauwels is thriving. It reported a profit after tax of Euro 7 million on a turnover of Euro 186 million during the first half of 2006. It has orders of over Euro 330 million on its books - the company's plants are booked for the next nine months.

"We got our money back in the first nine months," says Thapar, sitting in his well-appointed office in New Delhi. "The company's earnings before interest, taxes, depreciation and amortisation margin has improved from 1 per cent at the time of takeover to 6.5 per cent now, while the return on capital employed has gone up from 4 or 5 per cent to 22.3 per cent."

Thapar has now given his men 18 months to turn around Crompton Greaves' next acquisition, Ganz in Hungary. The company's factory has been lying shut for the last several months.

As Indian businessmen devour companies all over the world (a study done by the Federation of Indian Chambers of Commerce & Industry says there were 306 offshore takeovers by Indian companies between January 2000 and July 2006), estimates suggest most of them have done a good job of running these companies.

It's still early days as most acquisitions have taken place in the last year and it takes more time than that to turn a venture around. But the initial signs are encouraging. International mergers and acquisitions experts say this is not an easy task, especially when it involves cross-cultural deals.

A presentation by McKinsey & Company on 'Indian Companies Going Global: Best Practices & Early Warnings' for the Confederation of Indian Industry's national council meeting in September 2006 notes that only four of the 15 largest cross-border deals from Japan during 1980-2001 were successful.

On the positive side, experts say, Indians are in a better position to run overseas assets than their arch rivals, the Chinese.  "A Chinese entrepreneur would not know how to deal with labour unions; he wouldn't know how to operate in a system where money is not available on tap," says an industry observer.

"Look at our pharmaceutical companies," adds FICCI secretary general Amit Mitra: "Some of them have 70-80 per cent of their business outside India; so they are aware of the global business dynamics."

So, what managerial expertise are Indian businessmen bringing to the table? What are the skills they have put to use to bump up the performance of their recently acquired overseas assets?

In several cases, these companies have gained from the renewed business focus brought about by that extra dash of entrepreneurial drive provided by their Indian parent.

When Tata Motors acquired Daewoo's trucks business in South Korea in 2004 (the chaebol had collapsed under a debt of $80 billion, forcing the creditors to dismember it and sell the various businesses), it knew what was wrong.

"It was one of the three parts of Daewoo Motors, apart from cars and buses. It was dependent on local sales and even there it wasn't too successful," says Tata Motors managing director Ravi Kant. In the last three years, Tata Daewoo Commercial Vehicles has ramped up its production by more than double and stepped up the gas on market development.

"Our market share in heavy trucks in South Korea is up by about 4 per cent. We have entered the medium trucks segment and have taken 16-17 per cent market share from Hyundai and Kia. Almost two-thirds of all heavy trucks exported from South Korea are from Tata Daewoo Commercial Vehicles. Over half our production goes to overseas markets," Kant reels off the numbers rapidly.

The improved performance has started showing in the company's financials. The company's profit (before tax) grew 193 per cent to Rs 80.9 crore (Rs 809 million) in 2005-06 over the previous year, while its gross revenue rose 25 per cent to Rs 1,646 crore (Rs 16.46 billion) during the period. Both Kant and Ratan Tata were made honorary citizens of the North Jeolla province of South Korea in October 2004.

If Tata Daewoo Commercial Vehicles has gained from Tata Motors' expertise in production and marketing, Sembawang Engineers & Constructors of Singapore looks all set to benefit from the global network of Atul Punj, one-time pugilist who had to give up the sport because of a neck injury but still has the gait of a prize fighter.

Ever since Punj acquired Sembawang from the Singapore government for about Rs 100 crore (the Ruias of Essar were also in the race for this company, but the deal fell through; Punj then pocketed it for half his first offer) earlier in the year, his effort has been to connect it with large developers in Asia with whom he has a relationship: the Salem Group of Indonesia, which plans to make substantial investments in West Bengal and Prince Khalid Bin Bandar Bin Sultan of Saudi Arabia who, along with Emaar, is building a $31-billion city in the kingdom. Reluctant to discuss numbers, Punj says Sembawang has the opportunity to grow from $800 million now to $4 billion in the next five years.

A key element of the turnaround strategy is to migrate some production to India and save on costs. "We have given our overseas companies the backing of financially strong and cost-competitive manufacturing in India," says Bharat Forge chairman Baba Kalyani.

Having made a string of acquisitions in Europe and the US, Kalyani sees the financial performance of all companies "moving in the right direction on counts such as customer relationships, revenue and profitability growth and technology initiatives".

Surinder Kapur of the Sona Group acquired a significant stake in a French components company called Fuji Auto Tech last year. He now heads this company's procurement committee and hopes to make purchases worth $50 million from his units in India in a few years.

"My costs are 25 per cent cheaper," says Kapur. So, a $50 million order would straightaway add $12.5 million to the company's bottomline. Kapur noticed cash reserves of ¤6 million on the company's books. "We used that money for two acquisitions, one in Brazil and the other in the Czech Republic. From Euro 80 million, it has become a Euro 200 million business," says Kapur.

Even otherwise, it is now widely accepted that Indians are among the most cost-competitive producers in the world. "It's in the DNA of old-economy companies," says Thapar, who has turned around companies like Ballarpur Industries, India's largest paper company, and Crompton Greaves, through a lot of fat-trimming.

Observers credit it to the "bania budhi" (trader's cunning) gained during the licence-permit-quota raj. "With no freedom to expand capacity, you could only squeeze margins by having a tight control over costs," says FICCI's Mitra. The control regime did have positives.

Similarly, the consortium lending adopted by banks in the past made companies utilise their working capital very efficiently. "We roll over our working capital about four times in a year; abroad, a company may do it twice. So there are huge efficiencies waiting to be extracted," says a Delhi-based businessman who is close to wrapping up a deal in South-east Asia.

Homi Khusrokhan, the managing director of Tata Chemicals, has set the target of recovering the £100 million his company has paid to acquire Brunner Mond of UK in December 2005 through cost savings and better synergies with his operations in India within five years.

"This company was run by venture capitalists: tightly managed and very cost conscious but not enough freedom to grow the business," Khusrokhan says, adding: "We look at investments differently."

This is not to say that whatever Indians touch turns into gold overnight. The last balance sheet of Ranbaxy Laboratories (with 15 overseas acquisitions, it is next only to the house of Tatas which leads the pack with 27, according to the McKinsey report) shows that six of its nine overseas subsidiaries were in the red in 2005.

Talking about his 2003 acquisition of Aventis' generic arm in France, Ranbaxy managing director and CEO Malvinder Mohan Singh admits its turnaround is still a year behind schedule. "Prices have been down in France, Germany and UK. But we should be EBIDTA-positive (make an operating profit) by 2007 when we move more products to India for production," he adds.

But, he says, he has added scale to his other overseas buys. Ranbaxy had acquired Ohm Laboratories in the US in 1995 when it was a small $8 million outfit. According to Singh, it is now a $400 million venture. "We had acquired a unit from Bayer in Germany some years back which had sales of $3-4 million. We have now raised it to $30 million," Singh says.

However, Ranbaxy's latest buy - Terapia, a Romanian company that he acquired earlier in the year for $324 million - is earnings per share accretive from day one, claims Singh.

Once he had set his eyes on Terapia - it was the largest independent generics company in Romania with a fairly low-cost production base that could be used to feed the markets of Russia and the European Union - Singh out-maneuvered four other bidders, though the money offered by him was not the highest.

"I told them they would get all the money within 48 hours of signing the deal," says Singh.

Within three months of taking over the company, Singh has doubled the field force of Terapia and upgraded its manufacturing facility. "We have set an aggressive growth agenda for Terapia," says Singh who plans to double the company's turnover to over $150 million next year.

With more such acquisitions in the last months - Tata-Corus, Videocon-Daewoo, Tata Coffee-Eight o'Clock, Suzlon Energy-Hansen - it's time to acknowledge the Indian manager's talents.


Cultural affinities require that workers in merged companies don't feel alienated.

Five years ago, when Satish Kaura of Samtel acquired the medical imaging and avionics division of Thallus in Germany, little was he prepared for the culture shocks awaiting him.

 "We were surprised by the number of holidays people went for. Most would come back from one and start planning the next," says Kaura.

Kaura realised he was operating in a totally different cultural zone which was hugely efficient in technology and product development - something that did not happen in India.

 "Many people work there for four-and-a-half days, but it doesn't mean they aren't efficient," says Kaura. Though he had sent a handful of Indian managers in the first two years, the German operations are now run totally by a local team.

Learning from the mistakes made by others, Indian companies have decided against implanting their men at key management positions in their overseas ventures.

 "When you start cutting numbers, you mess up the issues," says Tata Chemicals managing director Homi Khusrokhan. After Tata Chemicals had acquired Brunner Mond in the UK from a venture capital firm late last year, it was clear that the earlier promoter had already downsized the workforce to extract better returns.

 "We had to focus on softer issues as there was a lot of uncertainty among the people," says Khusrokhan. None of the 300-400 people on the rolls was removed.

Tata Chemicals also ran a 100-day integration process after the acquisition. "The soda ash business of Tata Chemicals and Brunner Mond is now run like one business," he says, adding: "The trick of getting it right is to get the integration done successfully."

Tata Motors managing director Ravi Kant says : "The philosophy of our international business is to be seen as a local player."

The bottomline is clear: Local managers are leading the Indian charge in their overseas units. "There are no bad managers or workers, only bad leaders," says Gautam Thapar, putting the stamp of approval on his overseas employees.
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Bhupesh Bhandari in New Delhi
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