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Just before the 2008 financial crisis made headlines, Indian companies were on a global buying spree. In the fifth part of the series, Dev Chatterjee and Krishna Kant discuss how the crisis came as a black swan event for some, changing the mood from exuberance to despair.
Part I: Lehman crisis@10: Has the financial world changed for the better?
Part II: How the Lehman crisis unfolded
Part III: The ghost continues to haunt emerging markets
Part IV: Lessons India failed to learn from the Lehman crisis
Illustration: Uttam Ghosh/Rediff.com
In 2006, just two years before the Lehman crisis had hit the global financial markets, two top Indian business houses -- Tata and Aditya Birla -- made headlines by acquiring large companies abroad.
The acquisition of Novelis by Birla’s Hindalco for $6 billion and the buyout of Corus Steel by Tata Steel for $12.3 billion gave massive confidence boost to India Inc.
The global economic boom and cheap equity capital thanks to stock markets at stratospheric levels before the Lehman crisis put global companies on the radar of Indian business leaders.
But the global financial crisis came as a black swan event, changing the mood from exuberance to despair.
After losing billions of dollars over a decade, Tata Steel announced last year that it would merge its European operations with Germany’s Thyssenkrupp.
Birla, on the other hand, went ahead and bought yet another company -- Aleris Corp in the US -- in July this year for $2.58 billion to bolster the product portfolio and market opportunity for Novelis.
“We bought Novelis for $6 billion and we got equity of $3 billion back in the first three years itself. So our real capital invested in Novelis was about $3 billion.
"The value of Novelis today would be about $11-12 billion. So clearly we have gained in this acquisition,” said Kumar Mangalam Birla, chairman of the Aditya Birla group.
“The acquisition also helped Hindalco to move towards more value added products which has very high margins and it faces less volatility due to London Metal Exchange prices,” he added.
Tata Motors’ acquisition of UK’s luxury car maker Jaguar Land Rover (JLR) for $2.3 billion just a few months before the Lehman crisis hit the headlines proved to be a financial and strategic success for the car maker and the Tata group.
The company not only managed to survive the global economic turmoil that followed soon after the purchase, JLR emerged as one of the fastest growing luxury car makers and went past Japanese brands to become the fourth biggest luxury automotive brand behind the big-three German luxury car makers.
For most of the last decade the JLR division accounted for the bulk of Tata Motors’ consolidated profits and nearly two-third of its overall revenues.
More importantly, JLR provided Tata Motors with the technology and product development experience that the company is now using to claw back its share of the domestic passenger car market.
However, its massive investment in JLR now faces headwinds from the likely economic and trade dislocations caused by the UK’s planned exit from the European Union next year.
Sunil Mittal’s Bharti Airtel, which took over Zain’s Africa operations for $10.7 billion in 2010 during the post-Lehman recovery, says that he regrets making the acquisition as financial returns didn’t match up to the big-bang investment.
Analysts, however, say that the Africa business has cushioned the blow from the margin compression in the Indian telecom market.
The last fiscal year marked the first time that the company made more profits in Africa than in its bread-and-butter India business. In terms of revenues, Airtel’s Africa business is still less than half that of the company’s India mobile business.
Reliance Industries’ $10 billion investments in shale gas assets in the United States also did not go as per plan.
“The Lehman crisis did not deter Indian companies from buying asset abroad. There is no golden bullet for success. Indian industrialists will have to take that leap of faith in the future also,” said the head of M&A of an investment banking asking not to be quoted.
“The Lehman crisis did slow down India Inc's investments abroad but it did not stop them,” he added.
Back home, soon after the crisis, Indian companies went on a massive expansion drive as economic growth picked up pace and the Indian economy began to grow faster than the developed markets on which most of the big-ticket acquisitions were focused.
