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'Time ripe for major restructuring in India'

A Correspondent in New Delhi

Indian corporates are plagued by the persistence of uneconomic and fragmented capacities, resulting in a loss of value. While consolidation has not happened yet, India Inc. is poised for a major restructuring exercise, said Udayan Bose, Chairman, Lazard, United Kingdom.

He was speaking at the session on 'Mergers and acquisitions: Dealing with the aftermath' at the India Economic Summit organized by the Confederation of Indian Industry and the World Economic Forum.

Bose talked about the value erosion that occurs when a merger fails to take place.

Anand G Mahindra, managing director of Mahindra and Mahindra, introduced the session saying that the discussion would focus on the post acquisition problems faced by corporates.

To begin the discussion, he mentioned the most startling statistic that a merger has resulted in an increase in shareholder value only in three out of ten cases.

Vallabh Bhansali, chairman, Enam Financial Consultants, said that the difficulty with mergers arises when the objective of the acquisition is not kept in mind. Companies must have a clear objective, whether it is scale or a change in the product portfolio.

In fact, with increasing globalisation, Indian companies will appear small in size relative to their foreign competitors and therefore must consider inorganic growth as an option, he said.

Bhansali also pointed out that macroeconomic stability is a pre-requisite for the success of mergers. Otherwise, the assumptions on growth in market size turn out to be wrong and disappointment is bound to follow.

He expressed some concerns about the regulatory environment that makes the conditions for M&A too onerous. In response to a question on the effectiveness of the securitisation bill, he said that the market for distressed assets needs to develop quickly for the bill to be effective.

Rajeev Gupta, executive president, DSP Merrill Lynch, spent some time describing the Indian M&A market.

He said that acquirers are by and large Indian companies. Local synergies are present and acquisitions are largely about strategy and not about bargains.

Acquisition premia in India is extremely high: during the last three years, it was around 106 per cent compared to only 30-40 per cent overseas. This cannot be explained by the low multiples in the Indian market or the highly leveraged nature of Indian companies but rather the high value placed on control in India, he said.

Mass layoffs have never been an important agenda of the Indian acquirer, as value addition takes places largely due to differences in the cost of capital. Synergistic acquisitions have added significant value in India, he stated.

Art Bert, managing director, South Asia, A T Kearney, presented statistics to show that although the success rate of mergers is low, the rewards to successful mergers are tremendous just as the penalties to failed ones are severe.

The single most important factor in ensuring success is mastering the integration process. Mergers fail largely because of poor execution rather than a lack of strategic thinking. He listed the following points that he described as a formula for success:

• Create a sense of urgency;
• Establish clear goals and manage expectations;
• Select leadership quickly;
• Open, frequent and timely communication;
• Explicit focus on customers;
• Establish strong integration structure;
• Rigorously manage risks;
• Proactively address cultural issues.

In a stimulating discussion following the presentations, Indian corporate leaders expressed concern on cultural issues when acquiring foreign companies and Bert explained that there are tools available that allow mapping of cultures.

He also said that human resources play a critical role in the integration process. One concern expressed by acquirers of Indian companies was related to the poor quality of disclosures. Contingent liabilities of the acquired company often turn out to be more serious than presented at the time of the deal.

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