The largest ever Indian acquisition of a US company was announced this month. Apollo Tyres is to acquire Cooper Tire and Rubber, the world’s 11th largest tyre producer by revenues, for $2.5bn. Shares in Apollo tanked following the news, with investors sceptical about how the two businesses will be integrated.
Such negative reactions are not uncommon. Indian companies have completed a series of high-profile overseas acquisitions over the past decade and the initial response has often been bearish. But the doubters have often been proved wrong.
Three trends emerge from the successful approaches of acquirers in India who have successfully navigated foreign deals. First, Indian businesses are often looking for a technology or a brand that sells internationally – both of which require the knowledge and training of employees at the acquired business. So they are unlikely to bulldoze operations.
Second, Indian companies have experience dealing with diverse cultures. The Indian market alone is comprised of 28 states and there are 22 officially recognised languages. This means companies often adopt a moderate approach to ease cross-cultural suspicion.
Third, Indian businesses generally look to international expansion once they are on sound footing at home. So they are likely to have capital to invest in the foreign business.
The best known case is Tata Motors’ acquisition of Jaguar Land Rover in 2008. At the time of the purchase, the deal was widely criticised. What could an Indian brand out to produce the world’s cheapest car, the $2,500 Nano, do for the producer of quintessentially British luxury vehicles? And how could it add value that Ford, JLR’s previous owner, had not?
Five years on, the deal is considered a success. In the fiscal year ending in March, the once-ailing JLR earned net profits of £1.2bn.
Part of this was down to luck. For example, one model, the Land Rover Evoque, was already in the pipeline when Tata closed the deal, and went on to be a smash hit.
But internal factors also helped the integration. The preconception that companies from emerging markets swoop in and relocate operations to cut costs was a particular threat for a business where British trade unions wielded significant power. But Tata won them over.
“Our worries were that they would just lift this product from a high-cost economy and move it into a low-cost economy, making the same cars with cheaper labour,” says Roger Maddison, national officer for automotives at Unite, the British trade union. “But they said they’d be able to sell cars better in Asia and China precisely because they were British-made.”
Operations were left largely untouched. Only one person from Tata was installed on the board of JLR, to provide financial control. And to help with integration, exchanges were organised for corresponding teams in the UK and India to network and swap notes. At JLR’s production plant, which adjoins Tata Motors’ facility in Pune, UK employees were brought in to train local workers
A lot of money has been put into the business too. Product investment at JLR has increased from £786m ($1.2bn) in the 2010 fiscal year to £2.05bn in 2013, and will rise to £2.75bn in the current financial year.
Another quality that Indian companies bring to new acquisitions is experience of market that is hypersensitive to price. “Indian companies have learned to cater to the mass,” says Saurabh Mukherjea of Ambit Capital, a Mumbai-based brokerage. “Because all the job creation has been at lower income segments, a variety of Indian companies have had to figure out how to cater to that segment, whether it be in cars or clothes or fast-moving consumer goods. They then believe they have cracked the holy grail in their own country and believe they can replicate that abroad.”
One lesser-known deal was driven by this. Nicholas Piramal, the pharmaceuticals arm of the Piramal Group, bought a production facility at Morpeth, in northeast England, from Pfizer in 2006. Since the Indian company took over, overall revenue per employee has increased 20 per cent and operating margins have grown by almost 600 basis points.
Using its networks in Asia – the China office, in particular – Piramal has brought cheaper suppliers to Morpeth and material costs have fallen 6 per cent. Contracts for site maintenance, insurance and energy have been renegotiated. And within six months of taking over, Piramal had replaced the multiple, overlapping IT programmes used at Morpeth with an SAP system managed in-house.
“It’s not that you’re a conqueror,” says Ajay Piramal, chairman of the Piramal Group. “They have some strengths and we have some strengths.”
The company also did not overhaul the management team. Before the deal closed, the head of the Morpeth site declared that he wanted to move on. But instead of parachuting in a Piramal executive, a replacement was chosen from within the existing team.
Team leaders at Morpeth now report to the corporate office in India as well as site heads. And cross-cultural training programmes have allowed staff to build relationships with their peers abroad.
These strategies are not limited to Indian companies’ acquisitions in developed markets. Mahindra & Mahindra, the India carmaker, bought South Korea’s Ssangyong Motor for $466m in 2010 and adopted similar approaches. In the first three months of this year, Sssangyong reported operating losses of Won17bn ($15m), down from Won31bn in the same period a year earlier. And the manufacturer sold 12,607 vehicles in April 2013, its highest number since December 2006.
One tool has been “synergy councils” set up to allow the companies to learn from one another and create economies of scale in sourcing, product development and network development. Mahindra has also made new hires in product development and started a second shift on existing production lines.
“It was very important for us to not challenge the Korean culture, because they have a way of working,” says Pawan Goenka, head of Mahindra’s auto business. “We also didn’t send a slew of senior management people from India to change the business. We retained the Korean CEO and almost all of the first two layers of management are Korean.”
Indian businesses have been on a foreign shopping spree, making outbound acquisitions worth a total $126.18bn since 2003, according to Dealogic data. Companies with ambitions of building a global empire should take heed of others’ experiences.
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