HABIL KHORAKIWALA CMD, Wockhardt

With three European acquisitions already under its belt and 40 per cent of its Rs 980-crore sales coming from the continent, Wockhardt's CMD Habil Khorakiwala says it's the hottest place to be in: Why Europe? Europe accounts for $7 billion (Rs 31,500 crore) of the total generics business. The UK, Germany and the Netherlands are heavily genericised, accounting for 40-50 per cent of the prescription drugs. Others like France, Italy and Spain are witnessing some 30-40 per cent growth. But with the issues of language, regulations and so on, acquisition is a better route. What are the characteristics of the European market? Each market is different from the other. In the UK, the chemist buys drugs from whoever gives him the best price and the patient accepts any product that is offered. But in Germany, it's the game of branded generics, where you need a medical representative to go to a doctor and get them prescribed. There are rumours about you acquiring another German company... I can't comment on that at this stage. But we have raised $110 million (Rs 506 crore) through FCCB (foreign currency convertible bonds), primarily for acquisitions in Europe.

In may this year, Habil Khorakiwala, Chairman of Mumbai-based pharma company Wockhardt, coughed up $11 million (Rs 50.6 crore at the then exchange rate) to snag esparma, an unlisted German drug maker. It was Wockhardt's third European acquisition in six years, but with a difference. It only acquired the $20-million (Rs 90-crore) company's sales and marketing organisation and not its manufacturing facility. Reason? It already had access to low-cost manufacturing and R&D in India. What it needed was a marketing arm that could push its generic drugs (copies of popular off-patent drugs) in Europe's biggest market for them. Of course, it helped that esparma had 135 marketing authorisations (read: product registrations, something on the lines of FDA approvals, of which 67 were in Germany), nine international patents and 94 trademarks. At one stroke, it made Wockhardt's European operations bigger than India's.

The Wockhardt example only illustrates a trend that's been snowballing over the last two years-Europe is emerging as India Inc.'s favourite hunting ground for M&As. Of the 40-odd overseas acquisitions in the last year-and-a-half, about two-dozen deals have happened in Europe alone, mainly in the UK, France and Germany. But it isn't just pharma companies like Wockhardt that are making a beeline to the continent. Auto-component companies, polyester giants and it services providers are on the bandwagon too. Why this sudden rush to Europe?

Leap to London: Wockhardt picked up leading NHS supplier CP Pharma

Although the rush is across industry, the reasons are sector-specific. For instance, one view is that Europe is turning out to be a difficult place to do manufacturing business. It's becoming more and more of a challenge because of higher labour and environmental costs there. Says Rajiv Memani, Country Managing Partner and CEO, Ernst & Young: "Manufacturing businesses find it unviable to operate in Europe. So there are lots of deals available in Europe at a bargain than, say, the us." Concurs Raj Bhatt, CEO, Elara Capital Advisors, a London-based investment bank that has worked with Indian companies for M&As and stock offerings: "Because of globalisation, there is a pressure of pricing on European companies. They are feeling the pinch." The result is that dozens of companies in Europe are up for grabs. For instance, in the UK, says Bhatt, any company ranked between FTSE 250 to FTSE 1000 can be an appropriate fit in terms of deal size for acquisition by an Indian company.

The Cost Calculus

It's not just L.N. Mittal who has mastered the art of picking up companies in distress and then turning them into gems. Baba Kalyani, Chairman and Managing Director of the Pune-based auto-component manufacturer Bharat Forge Limited (BFL), did it too in November last year, when he acquired a bankrupt, but Germany's largest, forgings manufacturer, Carl Dan Peddinghaus (CDP) Gmbh. CDP, which had been under an insolvency administrator (similar to Chapter 11 of the us), made an easy picking. BFL only had to pay 6 million euros (Rs 32.4 crore then) upfront, and the remaining 23 million euros (Rs 124.2 crore then) was to be paid from cash generated internally and bank loans. "The seller was more interested in keeping the company running and protecting jobs," says Kalyani, who has been able to turn around CDP in just six months.

But the question is, how does a mere change in ownership make the European facility more competitive? To answer that question, one has to understand the workings of the automotive industry. Most automakers, referred to as OEMs or original equipment manufacturers, work with an established network of suppliers. Because of several reasons relating to technology, quality and regulations, it is virtually impossible for a new supplier, even if he offers a compelling cost proposition, to break into this network. At the most, a new supplier can hope to crack the "aftermarket" (for spare parts).

Therefore, acquiring an existing supplier is an easy way to break into the supply chain without bringing fresh capacity into the market. It works for the OEMs because they are under tremendous price pressure and, in fact, have supplier contracts that stipulate year-on-year reduction in prices. And suppliers can't do that unless they have access to a manufacturing unit that operates out of a low-cost country. Says Kalyani, whose acquisition of CDP makes him the world's #2 forgings player after ThyssenKrupp of Germany, besides a supplier to blue-chip OEMs like BMW and DaimlerChrylser: "In the us, the shift to low-cost suppliers happened almost 15 years ago, but in Europe the trend started only three or four years ago."

SURESH KRISHNA CMD, Sundram Fasteners

With Dana Spicer in its fold, Krishna's Sundram Fasteners gets access to leading vehicle manufacturers in Europe

So when the automakers became desperate to cut costs and turned the screws on their suppliers, the ones in Europe found the going getting increasingly difficult, and that opened the doors for Indian companies to go bargain hunting. Going back to the question of why Indian ownership of such European units makes them competitive, it's because when combined with cheaper production in India, the European output becomes more cost-effective, even as it offers other advantages such as proximity to suppliers.

No wonder other Indian suppliers have forayed into Europe too. Delhi-based Amtek Auto made a big acquisition last year of UK's GWK Group for $37.5 million (Rs 172.5 crore then). Around the same time, Chennai-based Sundram Fasteners also acquired the forgings unit of UK's Dana Spicer for $2 million (Rs 9.2 crore then). Although it's a relatively small acquisition, it gives the TVS Group company access to the OEM market in Europe. More recently, in October this year, Delhi-based Sona Koyo Steering Systems acquired a 21 per cent stake in Faurecia Systems, a steering column manufacturer in north-eastern France.

Like Wockhardt's, Sona's deal with Faurecia, first acquired in July by Sona's Japanese partner Fuji Kiko, is unique. Even though it's a minority acquisition (21 per cent), the French company (now known as Fuji Autotech) gives Sona access to European orders. Here's how: The French unit manufactures 2.5 million steering columns a year, which is about 16 per cent of the European market. Recently, the company won an order for an additional one million steering columns, and Surinder Kapur, CMD of Sona Koyo, hopes to execute at least half of that from his Indian unit. A classic example of how incremental businesses will be transferred to low-cost partners.

The French unit also buys components worth 50 million euros (Rs 300 crore) a year (both machined and stamped components) and Sona hopes to supply at least half of these (machined components) from India. All told, by 2008, Sona expects to get business worth 10 million euros (Rs 60 crore) from the French company on account of its minority acquisition. Kapur is also on the lookout for new technologies. Fuji Kiko has a company in Sweden that makes steering columns for commercial vehicles, a segment where Sona has no presence till now (it is focussed on passenger vehicles). Kapur expects his board's approval to enter the commercial vehicle space early next year, which it plans to do in partnership with the Swedish company.

The Lure Of Generics

Besides auto-components, the other sector that has seen a spurt in European acquisitions is pharma, led by Wockhardt and Ranbaxy. Mumbai-based Wockhardt was one of the first to enter Europe with its acquisition of UK's Wallis Lab in 1998 for $5 million (Rs 21 crore then). In 2003, it added to its European presence with an even bigger buyout-cp Pharmaceuticals, a leading supplier to UK's National Health Service (NHS), for £10.83 million (Rs 81.2 crore). It makes Wockhardt one of the top 10 generic companies in the UK. And this year in May, as noted earlier, Wockhardt acquired German esparma. "With these acquisitions, Wockhardt has a critical size for a push into the larger European Union," says Chairman Khorakiwala.

Under the deal signed with esparma's former owners Nordzucker Group, who did not think pharma fitted in with its core focus areas of sugar and chemicals, Wockhardt will continue to manufacture at the German unit (acquired by another firm) for the next two years, after which it would migrate production to its Indian or UK facilities. "Our idea is to leverage Wockhardt's research and technology focus and cost-effective manufacturing strengths and combine them with the European front end," explains Khorakiwala. For instance, Germany is the largest branded generics market in Europe, which accounts for 40 per cent of Wockhardt's sales. That's as much as what India contributes to Wockhardt's revenues. (The US and the other world markets account for the remaining 20 per cent). In Germany, the Indian rush is especially palpable. Says German Ambassador in India Heimo Richter: "There are around 300 companies in Germany already owned or controlled by Indians, and the numbers are increasing."

Springboard: Bharat Forge netted the top German forgings maker CDP

But the biggest acquisition so far in the pharma space is Ranbaxy's buyout of RPG Aventis, the France-based generic pharma company of Aventis, in December 2003. The deal is worth 70 million euros (roughly Rs 385 crore), and straightaway gives Ranbaxy a 5 per cent share of France's 652-million euro (Rs 3,912-crore) generics market. In fact, Ranbaxy had made inroads into the European market with smaller acquisitions like that of Rima Pharma (UK) way back in 1996 and of Basics (Germany-based generic company of Bayer AG) in 2000. It's interesting to note that pharma companies prefer to grow organically in the US, but choose the acquisition route in the European market. But E&Y's Memani says this trend is across the industry and not specific to the pharma sector. "In the us, it's easy to set up a greenfield facility, while in Europe it's tougher to start operations from scratch so acquisitions are easier," he says. But there is a flipside. In Europe, restructuring may not be as easy as it is in the US. For instance, social welfare rules do not allow companies to cut staff, besides which there are strict environmental regulations. But that only bothers manufacturing companies.

IT's On The Bandwagon Too

It may be for reasons of acquiring capacities (Reliance's acquisition of Trevira, a German polyester manufacturer, early this year), or for easy market access (Wockhardt' buyout of esparma), the European acquisition fever has spread across sectors. In the it products space, i-flex recently concluded a deal with France's treasury software specialist firm Login SA for picking up a 33 per cent stake. For i-flex, a banking software product company, Europe is an important market with 70 of the world's top 100 banks, including UBs, Rabo Bank, Lloyds, Deutsche Bank and Eurobank in Greece. Says Rajesh Hukku, CMD, i-flex: "Europe presents a great opportunity because of the large number of core banking systems that are coming up for replacement. Secondly, the new countries that have joined the European Union are also looking to upgrade their obsolete financial systems."

There are other Indian software product companies too who have smelt opportunity in Europe. For instance, Bangalore-based Subex Systems (telecom software space) acquired Alcatel's fraud management group in July this year while Hyderabad-based Four Soft acquired Dutch company CargoMate in October. Another Bangalore-based company Cranes Software, working in the engineering and scientific domain, too is actively scouting for acquisitions in the continent. Says Subhash Menon, CEO of Subex: "We went in for customers primarily and not the product, but there is a lot of growth happening in the European market."

SHYAM BHARTIA CMD, Jubilant Organosys

Delhi-based Bhartia shelled out Rs 75 crore for Belgium's PSI to gain a greater presence in Europe's formulations market

But in the BPO space, it was HCL that pioneered its European entry by acquiring British Telecom's Apollo Contact Centre in 2001. Although Europe has not seen any other Indian BPO deals since then, HCL has no regrets. The Belfast unit is the largest BPO firm in Northern Ireland and has grown from 350 employees in 2001 to 1,100 now. "It was very much part of our European entry strategy. Most of the Fortune 500 companies have significant presence in the continent and the acquisitions give us credibility for adding customers," says N. Ranjit, COO, HCL BPO. The company was set to buy the remaining 10 per cent in Apollo end-November (the total acquisition price will be £8.8 million or Rs 74.8 crore). Says Michael Arthur, UK's High Commissioner in India and one who spends half of his working time meeting Indian CEOs and economic ministers: "Indian investment in the UK has risen to such a level that it ranks eighth in the FDA league table of our country."

The acquisition mania is not just in predictable sectors like software, pharma or manufacturing. Business advisory may look like an unlikely candidate to catch the European M&A fever. But the fact is, Mumbai-based CRISIL bought out two companies in Europe-Economatters, a gas advisory company based in London, and Irevna, an analytics and equity research firm that has operations in the UK, the us and India-all in the span of the last one year. Says R. Ravimohan, MD and CEO, CRISIL: "It was not a deliberate 'geopolitical' strategy. They were looking for buyers and we fitted in." But, in hindsight, Ravimohan thinks the acquisitions have panned out well. For instance, Economatters brought in top-drawer clients such as British Gas, British Petroleum, World Bank, OECD and Gaz de France. Ravimohan is now looking at adding more capabilities to his portfolio; the next could be an advisory company in electricity space.

The relatively easy entry into Europe doesn't mean it will be smooth sailing for the Indian acquirers. On the contrary, there are issues they will have to deal with-from regulations to market liabilities to cultural issues. For example, when Kapur paid a visit to his French company after he acquired a stake, he was faced with worried employees, who feared loss of jobs to Sona's low-cost factory in Gurgaon. While Kapur did manage to allay their fears, some Indian acquirers will have a harder time doing that. Then, Europe's strict norms on everything from environment to customer protection make the Indian acquirer vulnerable to a host of lawsuits and penalties. Few Indian companies have any experience of dealing with such issues. But, as India's brave new corporate raiders will tell you, the benefits of a European presence far outweigh the risks involved.