''We are looking at companies that bring value in terms of brand, geography, or technology'' Swati Piramal, Head (Strategic Alliances)/Nicholas Piramal

At a recent awards function in Mumbai, Finance Minister Jaswant Singh made an unusual and impassioned plea to the gathered chieftains of corporate India. "The $100 billion that we have in forex reserves is there for your use. Please use it and go ahead and reach out to the world, it's yours to conquer." Well, you could put it down to yet another pitch on the 'India Shining' roadshow but the response he elicited told its own story. The remark triggered a spontaneous bout of applause from those gathered, including the likes of Anil Ambani, Anand Mahindra, and M.S. Banga, among a host of other corporate head honchos. Clearly the minister had struck a chord.

And why not? There is enough evidence to suggest that Indian corporates have never been more aggressive in terms of expansion plans and importantly, never more optimistic about their chances overseas. Domestically, the M&A market is starting to see structural changes reflective of a more mature M&A climate, while overseas plans are nothing short of a deluge. The proof of the pudding in this case is clearly in the acceleration of deal flow. "I can safely claim that on an average investment banks have seen at least a 50 per cent increase in deal flow over the second half of last year," says Rashesh Shah of boutique investment firm Edelweiss Capital. Agrees Vedika Bhandarkar, Head of Investment Banking at JP Morgan Chase: "There is a perceptible change in mood, and we should be seeing a lot of deals, particularly international, following the second quarter of this year."

A dipstick across leading Indian corporates reveals nothing short of a potential overseas acquisition wave of sorts. Take the pharma sector. Major players like Nicholas Piramal, Ranbaxy Laboratories, and Dr Reddy's Labs are actively looking for acquisitions to either penetrate new markets, gain manufacturing facilities, technology or even brands. "We are looking at companies that bring value in terms of brand, geography, or technology, and should conclude one acquisition in fiscal 2004-05. " says Dr Swati Piramal, Head of Strategic Alliances at Nicholas Piramal.

Ranbaxy, which has only recently announced its acquisition of RPG Aventis, the generic drug marketing arm of Franco-German drug major Aventis, is thirsting for more. "The company plans further expansion in key European countries and also in the US," says a senior Ranbaxy official. Dr Reddy's for its part is scouting Europe and has also evinced interest in acquiring Heumann, a German generics company owned by Pfizer.

Moving to another (and fairly unrelated) sector, Indian auto majors are making an aggressive push in global markets. The sector is keenly watching Mahindra and Mahindra (M&M), following its failed Rs 2,000-crore bid for Finnish tractor company Valtra. ''We would continue to look at acquisitions across our businesses-it could be in tractors, auto components or it services,'' says Hemant Luthra, Executive VP (Corporate Strategy), M&M. The deal sizes could vary from about $10 million (Rs 46 crore) for it services to about $50 million (Rs 230 crore) for an auto components business and, of course, the Valtra bid is some indication of the potential deal size of a tractor business acquisition. The company is expected to bid for and possibly conclude a mega overseas acquisition in the course of the year. The sector is especially under scrutiny following Tata Motors' acquisition last month of Daewoo Commercial Vehicle in a deal valued at $102 million (Rs 469.20 crore).

M&M is not the only company on the prowl in the auto ancillary business. Significant players like the Delhi-based Sumi Motherson Group and Omax Auto are also in the fray for overseas deals. Chennai-based Sundram Fasteners Limited (SFL), which just concluded a deal to acquire hot forgings unit, Cramlington Forge, from the UK-based Dana Spicer and is also in the midst of a merger with Chennai-based Autolec, continues to "keep an eye out for opportunities," according to Sampathkumar Moorthy, VP, SFL.

Companies like Raymond and consumer durable major Videocon are also quite vocal about their intention to snap up overseas companies. Raymond's Gautam Singhania says that the company is "looking at three acquisitions abroad, though nothing has been finalised yet." Raymond is particularly interested in an acquisition in Europe.

Videocon chairman Venugopal Dhoot says his company is "already in the final stages on some deals". He adds that the company can raise about $50 million (Rs 230 crore) internally and use that to leverage about $250 million (Rs 690 crore) more.

Oil and gas is another sector poised for action. Indian Oil Corporation, for instance, is understood to be interested in participating in the disinvestment process of government-owned oil companies in countries like Nigeria and Madagascar to make inroads into both refining and retail in these countries. ONGC on its part is looking at Sudan, Iran, Egypt and Russia to make further investments in oil exploration and production.

The clarion call seems to be 'globalisation' and the numbers in terms of deals last year bear this out. According to data put out by India Advisory Partners, an M&A advisory firm based out of Mumbai and London, there were a total of 49 overseas acquisitions by Indian companies in 2003 as opposed to 28 in 2002. The total value of the overseas acquisition deals in 2003 stood at Rs 8,049 crore vis-a-vis a paltry Rs 941 crore in 2002. But that's just on the overseas acquisition front. M&A deals within India, including private equity deals and overseas firms acquiring Indian firms grossed a deal value of $4.7 billion (Rs 21,432 crore) in 2003, down from $8.7 billion (Rs 41,798 crore) in 2002.

While the numbers for domestic deals may be down, the report clearly explains that 2002 was a year of a few large deals (deal value of over $111 million, or Rs 533.28 crore, each) while there were just four such deals in 2003. Also deals in 2003 happened across sectors. These factors prompt Kai Taraporevala of India Advisory Partners to comment, "my view is that you will have more depth in the M&A market now."

M&M is expected to bid for and possibly conclude a mega overseas acquisition in the course of the year Anand Mahindra, VC & MD/Mahindra & Mahindra

The Rationale For M&A

First, the domestic scenario. The sectors that are already in the throes of consolidation and expected to move into the next cycle of consolidation in India are telecom and banking. The rationale, as Rajiv Gupta, MD, DSP Merrill Lynch explains is simple: "We had done an analysis on sectors that have employed large capital and found that most of these sectors are highly fragmented. This is especially true of the Indian banking sector-18 prominent banks have deployed in excess of $5 billion (Rs 22,665 crore)-and the telecom sector where there are around six players in mobile telephony. There are just too many players, so we expect a lot of M&A to happen in these sectors."

As for valuations in the domestic market, they are definitely up, what with capital markets on a roll. While logic dictates that this should deter sellers who would want to hold on to their stakes in expectation of even better valuations, investment bankers like Ambit's Ashok Wadhwa have a slightly different take on it. "Valuations are getting re-rated and there is actually greater interest among sellers now." On the same pragmatic note, Shah of Edelweiss points out the buyer's perspective, "Consider a listed company that is trying to acquire a small unlisted company in a sector like steel. Suddenly, the target won't seem so expensive given the way markets have gone up."

To get a sense of the appreciation in share prices just consider the kind of price movement that a fast growing company like Bharat Forge has seen in the past year. The scrip, which currently is quoting at about Rs 785, was at Rs 250 or so same time last year.

There are other broader reasons for the hectic M&A activity according to investment bankers like Munesh Khanna, MD, Rothschild (India). "Profitability in Indian companies has gone up and there are better cash flows, where do you invest these? Companies also want to expand," he says.

Thanks to the new-found efficiency, capital availability has just gotten easier, especially for blue chips, whose ratings automatically improve with an increase in the efficiency level. Added to this is the easing of regulatory norms such as the RBI allowing external commercial borrowings of upto $500 million (Rs 2,266 crore) across sectors (this was earlier restricted to specific sectors). "Interest rates are very attractive. In fact, triple A rated companies are borrowing at 6 per cent in the Indian market as opposed to second or third rung companies, which are borrowing at 9 per cent. So there is an arbitrage opportunity in acquisition," says S. Srinivasan, Co-Head of Investment Banking at Kotak.

As for overseas acquisitions, the primary reason for the interest from Indian companies seems to be the attractive valuations of firms, particularly European ones. (See An Eye on Europe) Reason: They find the going tough thanks to an appreciating Euro and the emergence of several lower cost manufacturing centers. Moreover, from an Indian company's perspective, European firms with an existing client base offer a ready springboard to global markets.

Explaining the benefits of the Daewoo Commercial Vehicle acquisition, Tata Motors' Ravi Kant says: "We are looking at three actions: Increased marketshare for heavy commercial vehicles in Korea for Daewoo, products in the medium commercial vehicle segment through joint efforts of Tata Motors and Daewoo, and further exploration of other international markets with this combined product range".

Also take the case of Wockhardt, which recently acquired CP Pharmaceuticals in the UK. "We have a three-fold criteria while considering an acquisition. It should fill a strategic gap by way of access to new territories, product segments or technologies. Second, it should increase (our) marketshare and, third, it should create value through improved efficiencies of the merged organisation," says Wockhardt's Chairman, Habil Khorakiwala. Apparently, the underlying logic is applicable to other industries as well. "Given our stated vision of being an integrated player in wireline, wireless, data and international long distance, it makes sense for us to have global bandwidth," says a Reliance Infocomm spokesperson of the recently concluded $211 million acquisition of FLAG Telecom.

Integration-The Acid Test

The true value of an M&A deal can be extracted only if the merged entity is able to function as one company following the merger. According to investment bankers like Bhandarkar, this is possibly the biggest stumbling block in any merger. "The biggest issues are integration and the cultural fit," she says. Indian companies, however, are swiftly finding solutions to the issue. Take the case of Bharat Forge, which has put in place a concrete integration model following its takeover of the 116 million Euro, German company, Carl Dan Peddinghaus, a couple of months ago. It has created a 100-day integration program, with targets be it in micro-management or strategic integration. "We have basically created integration teams across manufacturing, purchase, procurement, design, engineering, sales, basically everywhere with the purpose of understanding and integrating the various processes," says Amit Kalyani, VP & CTO, Bharat Forge.

Even for a smaller firm like Pune-based it company KPIT Cummins, which concluded the acquisition of Houston-based SAP consulting firm PANEX late last year, integration was built into the transaction model itself. "We worked with them even before the deal, decided on the company focus and strategy together and then worked out the post-merger equity structure in such a way that payouts are available only if the business goals are achieved," explains Ravi Pandit, Chairman and Group CEO, KPIT Cummins.

Finally what is the investor base saying to all of this activity? Are the markets cheering these moves or are investors being cautious about reading too much into these deals? Far from it. "I think the true potential of these deals is yet to be discovered by the market," believes Atul Kumar, Director of Mumbai-based brokerage firm, Practical Financial Services. His argument: Some of the blue chips that have struck deals in recent months have obviously seen margins in overseas markets that they haven't got here. "Some of it is really big stuff," declares a sanguine Kumar. Let's hope he is right.

-additional reporting by Nitya Varadarajan