Preparing IROs for the new wave of M&A activity hitting the Indian market
Hitting the headlines early this year was Tata Steel’s takeover of Corus for slightly over $10 bn. Hot on the heels of that deal, Hutchison Whampoa of Hong Kong sold its controlling stake in Hutchison-Essar to Vodafone for a whopping $11.1 bn. Bangalore-based MTR’s packaged food division found a buyer in Orkala, a Norwegian company, for $100 mn.
Positive regulatory mechanisms, globally accepted business processes, and a robust investment climate have all contributed to this new acquisition trend. Yet most Indian companies in cross-border acquisitions tend to be small and are part of a ‘string of pearls’ strategy. This involves the acquirer buying small, unlisted, family-owned businesses that are not on the radar of global giants and financial investors but are of strategic importance as they have good brands, registration or licenses and distribution networks.
This type of acquisition creates unique challenges for corporates. The value gained by such deals is not immediately clear to the finance community. The knowledge and understanding of small and mid-sized companies requires intense understanding of local activity, which is neither easily accessible nor on analysts’ radar.
Challenges to shareholder communication generally remain the same across the board. With mid-sized companies on the road to becoming large, however, the bandwidth of management focus becomes strained and poor communication can ensue, during both the transaction process and the integration phase.
Crossing the border
In cases of large companies in cross-border deals, investor communications are further complicated. The size and complexity increases with bankers, lawyers and advisers on both sides as well as different time zones and cultural differences to deal with. The company’s message is not always clearly articulated when multiple decision makers are participating in the process.
With foreign institutional investors (FIIs), hedge funds and foreign capital inflow all having an impact on the stock markets, confusion can reign as the reactions from different perspectives merge. The Reserve Bank of India had to stop the purchase of Tata Steel shares by FIIs because their investments had reached the permissible limit following Tata’s acquisition of Corus. At the same time, many domestic institutions and retail investors exited the company following the acquisition.
The Indian stock market’s negative reaction was largely driven by concern that valuations of takeover targets were too high. Tata Steel’s shares dropped more than 11 percent from their year’s high before recovery began. Hindalco, Birla’s aluminum company, fell 13.8 percent the day after the takeover was announced. In the short term, according to a leading Indian investment bank, such deals ‘may not look like good value to Indian shareholders, but in the long term all the shareholders will benefit.’
With mounting pressure on Indian companies to go global, despite the market reaction, most managements are of the opinion that value will be built. If the Tatas and Birlas of this world gain a reputation for smooth M&A execution, it would have a great impact on how the global stock markets react to future Indian M&A.
There is also the matter of disclosure rules and legal issues, which are not uniform between countries. Information provided in one locality will inevitably be accessible worldwide, so the safest assumption is that everyone has access to everything you say, regardless of where or how you say it.
Timing is everything
An important consideration when planning the announcement is trading hours; not all Indian companies in cross-border transactions manage stakeholders in the different time zones simultaneously. As the investment banker’s role focuses on the legal aspects of the transaction, the challenge is for the CEO, CFO and IR personnel to evolve an appropriate strategy.
Investors want to look into the eyes of CEOs, hear them explain the strategy and see them be open and transparent about when and how they made their decision. When the acquisition is complex, this becomes even more important, as Allcargo Global Logistics discovered when it acquired ECU-Line, a company with 120 offices in 65 countries.
‘Each country had its own complexities, even though they were all in the same business,’ explains Ashit Desai, director of Allcargo. ‘The challenge was to convince analysts to look at the business from our perspective. We veered away from the conventional parameters and developed our own business metrics. It took a lot of meetings with analysts and investors, but eventually they understood the rationale behind our approach.’
The challenge of managing expectations post-acquisition is critical. The analysts, having accepted the reasons for the acquisition, then expect the impact to be seen in the numbers. The reality is often different, however; it is the turnaround process that poses the challenge, when the human element and the integration element creep in.
In a booming economy, analysts tend to overestimate the impact of acquisitions. Managing expectations without losing the key message of growth is a new challenge for investor communications in fast-growing Indian companies.
