Tata leads the way: Acquires Corus for $8 billion

No prizes for guessing what's the flavour of the season in corporate India. It is, of course, global M&As. The most stunning display of that ambition is Tata Steel's proposed acquisition of Anglo-Dutch steel major, Corus. The biggest acquisition ever by an Indian company abroad, the deal values Corus at $8 billion, or Rs 36,800 crore, and fetches Tata Steel an additional 18 million tonnes of annual steel capacity, catapulting the Indian company from #56 in the global steel industry pecking order to #5. It is reasonable to expect that other large Indian groups will now feel similarly emboldened to buy global companies much larger than themselves.

It's a significant trend. As our report on this year's BT 500 companies shows, nearly 40 per cent of the top 50 companies by market cap have made at least one acquisition overseas. The industries range from pharma to it to auto to consumer electronics. The rationale for acquisition is different for different industries-for manufacturers, it's a question of scale, while for it and pharma, it's more a question of IP and customer relationships-but the underlying realisation is the same: One cannot hope to be globally competitive just being a (small) player in India. So, it's likely that we'll witness more big-ticket purchases abroad by Indian companies.

The worst thing that could happen to this whole process of India Inc. going global is it turning into some sort of a game of one-upmanship. In these times, when India has everyone's attention, raising capital to fund mega acquisitions won't be a problem for Indian predators. The pitfall, however, would lie in stretched valuations. As more and more wannabes from emerging economies bid for weak global companies, valuations will surge-it is simple economics. Although often times they may seem so, M&As aren't about bragging rights. Size matters only if it creates value, and doesn't destroy it. Needless to say, enhancing value gets harder every time a target company is won in a bidding war. That's one reason why not all M&As tend to work.

How can companies ensure that, in M&As, 1+1 is greater than 2? By being careful about the money they pay and the company they acquire. In the Tata-Corus deal, for instance, the theoretical argument is that Corus is a high-cost producer of steel, while Tata Steel is already one of the lowest cost products, with its own mines. The bet is that there are enough synergies between the two companies-especially in terms of products and geographic presence-to justify the 26 per cent premium the Tatas are paying Corus shareholders. In general, cherry-picking may work better for acquiring companies by filling up gaps in their strategic capabilities. If size were the only thing that mattered to shareholders, then General Motors and Ford would have long merged.

No Quick Buck

The stock market watchdog, the securities and Exchange Board of India (SEBI), has plugged one more loophole in the primary market by mandating a one-year lock-in for venture capital firms, Indian and foreign, in any pre-IPO placements. SEBI had earlier smelt a rat in the discretionary allotment system, which it immediately replaced with proportionate allotment. But resourceful promoters figured out other ways to increase valuations of their companies. One popular ploy of late was to bring on board a venture capital or private equity firm just ahead of the company going public. Rather than serve a genuine financial need, such investments-in some cases-became an easy way of setting the floor price of an IPO that may or may not be reflective of the fundamentals of the company. All the big issues in the past, including ABG Shipyard, Suzlon, Sasken, IL&Fs Investmart, Allsec, Gokuldas Exports, Shringar, India Bulls and Gateaway Distiparks had pre-IPO placements. An analysis of such IPOs shows that the offer price in the complex book building issues was getting fixed closer to or higher than the IPO placement price. This is not to suggest that the promoters and the venture investors were in cahoots in all the IPOs mentioned earlier. But it was evident even to SEBI that the trend was not a healthy one. After all, VCs are meant to stay invested for six to seven years before exiting a company, and not six to seven months. The guidelines for qualified institutional investors, especially foreign private equity players, have always mandated a minimum lock-in of one year. With the new ruling, VCs will also be required to stay invested for an extra year.

Will SEBI's latest diktat deter VCs and private equity investors? Unlikely. India's growth story is still robust enough to justify the type of long-term investing that this class of investors do. Indeed, there are millions of dollars being raised by them for investments in India. From the investor's point of view, this move would certainly go a long way in correcting the distorted price discovery mechanism in the IPO market.

Usually, small investors tend to get attracted by the presence of venture firms in a company tapping the market. Even in the secondary market, many investors take price guidance from the valuation benchmarks set by pre-IPO investors during the initial listing of the shares. Whatever may be SEBI's provocation, it's a move that ensures there's now one less method of scamming the small investor.

Needed: Soft Skills

Assimilation: A must for executives

Life has come a full circle for India Inc. Time was when the corporate world (it wasn't called Corporate India or India Inc. then) was a closed, chummy circle of executives who frequented the same clubs, played bridge in the evenings and golf on weekends. Entry into this charmed circle was, usually, restricted to those with the right backgrounds and social skills-this usually meant being born into the right family, having an education from some half-a-dozen public or convent schools and colleges in the metros and-this was especially true in the boxwallah companies of yore-the ability to hold one's drink. Issues like qualifications and merit did play their roles, but these were, in many cases, peripheral to the more essential social Ps and Qs. Several foreign-, mostly British-owned companies (not all of them were multinationals; a majority were Indian companies owned by foreigners) even had long "happy hours" on select days of the week when liquor was served free in the lunch room for expatriate and senior Indian executives.

The march of socialism ended all that in the 70s. Over the next three-and-a-half decades, Indian businessmen have built enterprises that are now confidently taking on the world. Indian companies now have managers, financial engineers, code jocks and others who are at par with the best in the world. This core competence is built on the back of merit. That is the base of the edifice called the Indian growth story.

But as India Inc. goes global, it needs to build other, softer, competencies as well. Executives across all levels will have to develop social skills that will enable them to assimilate themselves into alien societies. As Mohanbir Sawhney, McCormick Tribune Professor of Technology, Kellogg School of Management, says: "While Indian engineers are good at maintaining and testing software, it's about time they also learnt how to hold a glass of wine and swing a golf club. It will go a long way in building a global brand." It is a fact of life that executives in foreign companies taken over by Indian ones will have to learn Indian values and traditions. But as Indian companies buy up bigger, larger foreign counterparts, executives down the line-who actually make or break the process of operational and cultural integration-must also learn about the social graces of the countries they will have to deal with. It is, after all, much easier to bond with someone you walk down the fairway with every weekend, than with the person who sits in a cabin and barks out orders. The world of business, though not borderless, is increasingly becoming so. Cross-cultural assimilation, then, is the way forward.