In the global M&A wars, 'India's time has come'
DEREK DeCLOET
From Saturday's Globe and Mail
theglobeandmail.com
Mumbai, India — Ajit Mahadevan had made his decision. The lure of family was too great to resist; it was time to pack up and move home. But his colleagues in the London office of Andersen Consulting had some career advice for him, expressed succinctly: Are you out of your mind?
"When I moved to India, there were a lot of guys who basically said, 'You're crazy. Why are you going back?' " says Mr. Mahadevan, now a 36-year-old pharmaceutical executive.
"The feeling was always that your quality of life is much better in the quote-unquote West. The kind of work you were doing was seen to be more glamorous . . . and I think lots of them felt that I was limiting my options."
It was, he adds, not an unfair view. When he left Mumbai, formerly known as Bombay, in the early 1990s to do his MBA at Carnegie Mellon University in Pittsburgh, India was just starting to crawl out of the rubble left by 4½ decades of socialist dogma. Corrupt, stifling, bureaucratic: It was the kind of place that an ambitious young business student with an entrepreneurial streak would leave, never to return, except on vacation.
That was the India that Mr. Mahadevan's co-workers knew. But by the time he'd resolved to come back for good, in 2000, his country was "not even recognizable." And he means that in a good way.
There was immense poverty, of course, and still is. At least one in five Indians lives below the poverty line, and a census in 2001 estimated the urban slum population at more than 40 million, some 6.4 million of them in Mumbai, the commercial capital. Inside the gates of the pristine office park in south Mumbai where Mr. Mahadevan now works, you'll find well-kept greenery and gleaming new office towers. Outside, thousands of people live in curbside shacks made of corrugated metal and cardboard, where there's no running water most of the time and men urinate on the sidewalk in plain view.
But beyond the struggles of India's poor, something else has been happening, too. For the skilled or educated, new opportunities are coming up. After decades of sluggishness -- a 3.5-per-cent growth rate was snidely referred to as "the Hindu rate of growth" -- India is acting like the Asian tiger that some people always thought it could become.
The momentum has been building since 2003, and India's economy is now growing at an annual rate of 9 per cent, not far below China's latest figure of 10.4 per cent. Economists at Goldman Sachs last month projected for the first time that India's economy might surpass America's in size before 2050. India's new prosperity is so well known that Westerners frequently speak of it in the same breath as China's -- the only economy that will be larger by the middle of this century, according to Goldman -- as though the two are the similar.
That idea is absurd, most of all, to Indians. While both countries are developing quickly, by most measures China is years, even decades, ahead of India. China's economy is three times as large (in U.S. dollar terms). It will receive seven times as much direct investment this year, says the Institute of International Finance. China has 20 companies in Fortune's latest ranking of the world's 500 largest corporations, to India's six.
But despite its still-minor presence in the world economy, India's boom might prove to have a more tangible impact on employees, investors and companies in Canada and the rest of the developed world. Chinese goods may dominate the shelves at your Wal-Mart, but an Indian-controlled enterprise is probably more likely to be merging with -- or taking over -- the company you work for.
Why? Paradoxically, it's the same reason the country's development is so far behind its neighbour's. India's government, in many respects, is inefficient and utterly incapable of good planning. (All it takes to prove this is one ride on Mumbai's decrepit roads or on its dangerously overcrowded trains.) So -- as much out of necessity as free-market ideology -- since 1991, the Indian government has been gradually stepping back and reducing its influence over the economy. That's not to say India isn't still a horribly overregulated place to do business: It ranks 134th out of 175 countries in the World Bank's ease of doing business index, behind such beacons of capitalism as Russia, Iran and Belarus. But the government's incompetence means that, unlike China, India's rise has been led almost entirely by the private sector.
The result is the birth of an entrepreneurial class that, for the first time, is showing a real inclination to look beyond India. Increasingly they have the money to do it: The Sensex 30 index, the most widely used measure of the Indian equity market, has returned 36 per cent a year over the five years that ended Jan. 31 -- thrashing the Shanghai composite's 15-per-cent return. And a healthier stock market is just one of several advantages India Inc. has over China in appealing to Western investors: the English language, culture, democracy, a familiar (if slow) legal system.
Over the past year, Indian companies have been in the middle of the global M&A frenzy. Hindalco Industries Ltd., a major Indian producer of aluminum and copper, this week agreed to pay about $3.4-billion (U.S.) for Atlanta-based Novelis Inc., until recently a unit of Montreal's Alcan Inc. Earlier this month, Tata Steel emerged as the winner of an exhausting bidding war for Corus Group PLC, the Anglo-Dutch steel company, at a price of $14.3-billion. Those came on the heels of a series of smaller international acquisitions by Indian companies such as Tata Tea, Ranbaxy and VNSL, which bought a company well known to most Canadian investors -- Teleglobe International.
"The confidence level of the Indian corporation can't be ignored," says Peter Nesbitt, Export Development Canada's chief representative in New Delhi. There's a feeling, he says, that "India's time has come."
Two things are missing from all the acquisition activity: outrage and fear. When Chinese companies try to take over Western ones, particularly in resources, they often run into a political wall. Think of the furor in Washington when China National Offshore Oil Co. Ltd. took a run at Unocal Corp. in 2005, or the one that erupted in Ottawa the year before when China Minmetals Corp. wanted to buy Noranda Inc.
Last summer, an executive from China's largest energy company lamented that two years of talks with oil sands producers in Alberta had come to nothing. A few months later, Finance Minister Jim Flaherty said Ottawa would "protect Canada's assets" in takeover bids by state-run foreign entities -- a policy viewed as a clear shot at China.
Yet few politicians have bothered to raise a fuss over Hindalco's play for Novelis or over Tata Steel's growing prominence in an industry whose most powerful individual is Indian-born Lakshmi Mittal, the world's fifth-richest man and chief executive officer of Arcelor Mittal. And it's doubtful that anyone would be alarmed, or even surprised, if either of the two Indian companies made a bid for Stelco Inc. or one of the other remaining independents in Canada's steel business.
Part of the explanation is that broad swaths of the Indian economy are now free of state protection, so the takeover money is flowing both ways. Vodafone Group PLC's $11.1-billion purchase this week of a two-thirds stake in Hutchison Essar, India's fourth-largest mobile phone operator, was the biggest takeover in the country's corporate history. It gave the mobile company an enterprise value approaching that of Telus Corp.
There is the promise of more. Prime Minister Manmohan Singh's coalition government recently floated the idea of raising the foreign ownership limit on insurance companies to 49 per cent from 26, a move that would benefit Toronto-based Sun Life Financial Inc., which is up against the cap in its joint venture with Aditya Birla Group (the conglomerate that is also the corporate parent of Hindalco).
A bigger change may come in 2009, when India is supposed to begin liberalizing its banking sector. That would make a tempting target for companies like Bank of Nova Scotia, which two years ago tried to get a foothold by buying a minority stake in the Bank of Punjab, only to be foiled by India's central bank.
But it's culture, not openness to foreign money, that is corporate India's trump card against China. As an English-speaking democracy -- one with a 132-year-old stock market and British legal system -- its takeover ambitions are more welcome, or at least less feared, than those of state-controlled companies from a Communist dictatorship.
"If you look at some of these acquisitions, many of them have been 'Anglo-preferential,' " says Mr. Mahadevan, who helped devise M&A strategy for Nicholas Piramal India Ltd., a drug manufacturer, and now runs a division that makes pills for larger pharmaceutical companies around the world.
"It doesn't seem too culturally dissimilar to do [deals] in Canada or the U.S. or the U.K."
Sunil Mirani has seen this firsthand. About seven years ago, he and a partner were looking for ways to capitalize on the outsourcing movement and on India's abundance of cheap, educated, English-speaking labour, and so started a market- and data-analysis firm.
Two years ago Mr. Mirani tried to more than double its size by swallowing a Canadian firm in the same industry. The deal fell apart for valuation reasons, but he thinks that 10 years earlier, an Indian company never would have gotten so close. "I don't think we would have been taken seriously."
Beyond the benefits of language and democracy, Indian companies are undeniably helped by the fact that a lot of international investors would rather put their money in the hands of Indian entrepreneurs than Chinese ones.
"You get a far better quality of management" in India, says an Asian mutual fund manger who has worked in both Hong Kong and Mumbai and seen both sides. China's growth may be superior, but too often its executives waste money on empire-building. Indian companies are among the most profitable in Asia; almost all of the Sensex 30 companies produce returns on equity of at least 10 per cent, according to Bloomberg data. "What's missing in China is the focus on profitability."
That's why, while China may be the clear winner for investment in new factories, India holds its own when it comes to drawing foreign money to its capital markets. The number of foreign institutional investors registered with SEBI, the stock market regulator, recently passed 1,000 and has nearly doubled in three years. Foreign investors held about $50-billion in Indian equities at the end of 2006 and are estimated to be putting in another $10-billion this year.
The appeal is obvious to Toronto portfolio manager Richard Rooney, president of Burgundy Asset Management Ltd., who has travelled extensively to visit companies in both China and India and says there is no comparison.
"India is light years ahead when you talk to managements," he says. "You can go into an Indian company and . . . hear about return on equity, return on invested capital, [profit] margins. You go into a Chinese company, you never have the faintest idea what you're going to get." (Nor will you know if you can trust the numbers. On one trip to mainland China, Mr. Rooney sat down with someone from a large international accounting firm and asked how Chinese bookkeeping practices differed from those in the developed world. In two ways, replied the accountant: "Accuracy and reliability.") That underscores India's biggest edge in the M&A wars, says Gaurav Deepak, a Mumbai investment banker and co-founder of Avendus Advisors. China "does not have a vibrant and deep capital market," but India does.
"Indians, I believe -- and it's a personal view -- are an aggressive lot. They want to win," Mr. Deepak says. Growing up in India, "you have to fight to get into a school, to get into a car, to get into a train . . . Now they're fighting in a global market."
On a sunny Thursday afternoon, the customers are lined up three- and four-deep at the counter at Lifestyles, a department store in Mumbai. Up in the toy department on the second floor, a young clerk named Jeetu Agrahari looks at the crowds and shrugs. "Because of the sale," he explains.
Indians love a bargain (and love to bargain --haggling over prices is practically the No. 2 sport after cricket). They're also learning to love so-called "organized retail" -- supermarkets, shopping malls, retail chains carrying foreign brand names. It's a new phenomenon, and still tiny, commanding between 3 and 5 per cent of retail sales, according to most estimates. (The rest goes to traditional bazaars, street vendors or hole-in-the-wall shops that seem to crowd every sidewalk in the city.) But even that represents a massive change. Some consumer goods taken for granted in the West used to be impossible to find here. "Ten years ago, I had to bring toilet paper," recalls Luisa Lencastre, a native of Portugal who has just moved to India for the second time to take a job as public relations director of Mumbai's new Four Seasons Hotel. "Now, you can get anything."
Wal-Mart Stores Inc. is working on a joint venture with the Bharti group after the government opened the retail sector to some foreign investment; Tesco PLC, the giant British supermarket chain, has been poking around as well (and is thought to be talking to the Tatas, one of India's most prominent business families). At the Phoenix Mill, one of a handful of modern shopping malls built on former industrial sites in Mumbai, Marks & Spencer has moved in, alongside Nike, Lacoste and a Guess Jeans outlet.
All are attracted by the mushrooming middle class, estimated at 300 million people, the equivalent of the population of the United States, and it's their behaviour that has created much of the bullishness. "A large part of the 9-per-cent growth [forecasts] is predicated on consumer spending," says Rajrishi Singhal, executive editor of the Economic Times, the country's largest business daily.
Some hope India will prove less susceptible than China to a slowdown in the developed world. The numbers say they may be right. India's total trade -- imports plus exports -- averaged 37 per cent of gross domestic product (GDP) between 2003 and 2005, according to World Trade Organization data. China's trade-to-GDP ratio was 65 per cent.
"The growth in Indian consumer demand is not something that one sees that often in the foreign press," says Anjali Bansal, a former McKinsey consultant who now runs the first Indian office of Spencer Stuart, an executive search firm.
Look at the telecom industry, she says. How could Hutchison Essar be worth some $20-billion when cellphone rates in the Indian market are as low as one rupee per minute (about 2½ cents)? The answer is growth: In 2002, there were 10 million mobile phone subscribers in India, now there are 150 million, and Vodafone chief Arun Sarin has said he thinks it will reach half a billion by 2012.
Banking is another sector where demand is exploding. When the country began its economic reforms in 1991, few Indians had mortgages. Credit cards were for the elite, and India's state-run banks seemed to actively discourage borrowing. Chandni Sahgal, a management consultant in Mumbai, remembers going for her first mortgage in 1987. "They would give you a [waiting-list number]. They would call you for an interview three months later and charge you 15½ per cent interest," she says. "The day your loan went through, you would celebrate."
Today, the banks can hardly write new loans quickly enough. State banks are increasing the size of their loan books at 30 per cent a year -- or more. ICICI Bank Ltd., the largest private-sector bank, has raised its stock market value tenfold in four years, to the equivalent of $19-billion.
But if you're looking for danger signs -- and there are a more than a few in India -- the financial sector is a decent place to start. Credit is growing so quickly that a lot of banks are having trouble attracting enough deposits to fund them.
Inflation is running at more than 6 per cent and is on the rise. So are interest rates. Yields on 10-year Indian government bonds have spiked up to more than 8 per cent for the first time since last August.
Incredibly, in a country of 1.1 billion people, there are shortages of certain kinds of workers, including business managers. "There's a crunch on skilled labour at every level," says Ms. Bansal of Spencer Stuart. That's not helping the inflation picture. Employees expect a minimum 20-per-cent salary increase when they change jobs; senior executive pay is rising at 30 to 40 per cent a year, she says. Property prices are going up so fast in some cities that talk of a real estate bubble is even more pervasive than talk of a stock market bubble.
There are much bigger worries than that. Some of India's problems are so large and intractable that it's hard to imagine where to begin to solve them. The country's business press this week trumpeted a deal between Citigroup Inc., Blackstone Group and two local companies to start a $5-billion infrastructure fund. But that represents a mere 1.5 per cent of the $320-billion the government estimates it will need to fix roads, ports and other infrastructure. And it's a perennial concern that the vast inequality will come back to haunt India and halt its progress. As Ms. Sahgal puts it: "You can't live with such a large portion of the population not included."
For most of India Inc., the preoccupation isn't about social issues or the bigger economic picture; it's about how to sustain rapid growth and find the next deal. "Sometimes in a country's evolution, there's a time when it sort of begins to feel confident. And I think that's what's happening," says Mr. Mahadevan, the pharmaceutical executive.
"Today, if guys talk about going back to India, no one says they're crazy any more."
*****
Financial services
China's largest lender, the Industrial and Commercial Bank of China, has a $216-billion (U.S.) market capitalization. India's largest private sector bank, ICICI, is less than one-tenth as large. Credit cards are still scarce -- there are fewer than 30 million of them. The growth possibilities are huge. "On a longer-term basis, you just can't go wrong with these guys," says a Mumbai-based mutual fund manager who owns bank shares.
Engineering and design
Think that "outsourcing" means some guy in Bangalore waiting to answer a customer complaint line? Not any more. The new outsourcers are companies like Plexion Technologies, doing research and design for companies such as Rolls-Royce. One consultant estimates there are at least 80 Indian companies working on design for North American cars or parts.
Mobile telecom
"It took me eight years to get my first telephone," recalls management consultant Chandni Sahgal. "I applied in 1982 and got it in 1990." The cellphone has changed everything. Indians now forget about land lines and are picking up mobile phones at a rate faster than China -- more than six million new subscribers a month. But it's probably just getting started. Vodafone Group's CEO figures the market will more than triple by 2012 to 500 million users.
Retail
Wal-Mart is coming (probably). So is Tesco (maybe). Retail is one of the most fragmented, inefficient businesses in India today -- but it's changing rapidly as the middle-class population warms to the allure of shopping malls, department stores and supermarkets. So-called "organized" retailers have less than 5 per cent of the market.
Pharmaceuticals
Big Pharma used to despise Indian drug companies because they would ignore U.S. patents and create their own knockoffs. Now they look to the country as a source of cheap scientists and pharmacists to help them design and manufacture their products. Next step: Indian companies doing their own R&D, inventing their own drugs and exporting them.
Inflation
At 6.7 per cent, it's starting to become a major concern. The government has ordered state-run fuel companies to chop the price of gasoline, but it might not be enough. Food prices are going up, a major hit for the poor. Long-term interest rates have been moving up, and banks have had to pay more to attract deposits.
Asset bubbles popping
The Sensex has gone from 3,000 to 14,000 since April, 2003. Merrill Lynch says the equity market trades at 19 times forward earnings, one of the world's most expensive emerging markets. Real estate is worse. In large cities, when they talk about apartments, they often talk in Manhattan prices. "If I sold the apartment that I lived in, I could have my next five generations looked after," says Mumbai businessman Gul Kripalani. Not enough skilled labour
Indian CEOs worry they are being forced to promote managers before they're ready. Leadership talent is scarce and getting more expensive. Spencer Stuart, a leading headhunting firm, says pay for senior managers is rising 30 to 40 per cent a year. But wage inflation is pervasive lower down the ladder, too: Salaries for entry-level hotel workers in Mumbai have doubled in the past year.
Infrastructure
The distance between Mumbai's old financial district to its new National Stock Exchange building is at most 15 kilometres. It can take an hour to drive between the two in midday traffic. Things aren't much better outside the major cities. "We have a national network of roads, but it's in pathetic condition," says Economic Times executive editor Rajrishi Singhal. Congestion and the gridlocked port system are obstacles to manufacturing.
Not enough education
World Bank data from 2000 pegged the poverty rate at about 35 per cent. Today, most figures place it somewhere between 20 and 25 per cent. Progress is being made, but not quickly enough for the millions confined to slums or the estimated 40 per cent of Indians, many of them in rural villages, who can't read or write. As the gap grows between the middle class and the poor, so does the risk of a political backlash.
*****
India by the numbers
134
2006 rank on World Bank's "ease of doing business" index
$6.6-billion
Foreign direct investment
(2005, in U.S. dollars)
6.7%
Inflation rate
(most recent estimate)
2.6 million
Oil consumption
(barrels a day, 2006 estimate)
4,730
Publicly traded companies
(as of Jan. 1, 2005)
SOURCES: BLOOMBERG FINANCIAL, WORLD BANK, UN CONFERENCE ON TRADE AND DEVELOPMENT. U.S. DEPARTMENT OF ENERGY. NATIONAL STOCK EXCHANGE OF INDIA
*****
China by the numbers
93*
2006 rank on World Bank's "ease of doing business" index
$72.4-billion
Foreign direct investment
(2005, in U.S. dollars)
2.2%
Inflation rate
(most recent estimate)
7.4 million
Oil consumption
(barrels a day, 2006 estimate)
2,470**
Publicly traded companies
(as of Jan. 1, 2005)
*Ranking is for mainland China. Hong Kong ranks 5th.
**includes Hong Kong listings |
