The Urge To Merge

IS every Indian company today a sitting duck for the corporate predator? That's what the valuation experts and equity analysts will have you believe. Stocks, they say, are trading at such ridiculously low levels that even the bluest of blue-chip companies can be bought over for less than one-fifth or sometimes even at one-tenth their asset value! Sounds incredible?

The number-crunchers have done adequate homework to back up their claim. A corporate raider, they argue, needs only around Rs 40 crore to mount an offensive against a company like Ballarpur Industries with sales of Rs 1,300 crore and net profits of Rs 104 crore in 1996-97. Similarly, Tisco can change hands at Rs 1,000 crore, Telco for Rs 1,300, Tata Chemicals for Rs 500 crore, Essar Steel for Rs 150 crore and so on. Why talk of the crown jewels, there are dozens of small companies like Rathi Mercantile or Mask Investments worth all of Rs 10-15 lakh or even less! Enough incentive for any company with any cash to go after the mouth-watering ratios.

Is it takeover time, then, at corporate India? There's little doubt that the urge to merge is at its peak. The proof is in the numbers. Hindustan Lever has just gobbled up Lakme and is merging with Pond's. Sterlite is raising the stakes to take over Indal. Wockhardt has picked up the Tata stake in Merind while offering to buy public holdings as well. India Cements' overtures to Raasi Cement are getting bolder. Jagatjit Industries is in talks with Brown Forman to sell off its liquor business. Autoriders has made an open play for Saurashtra Cement.

That's not all. There's intense speculation on the fate of companies like Hoechst Marrion, Sesa Goa and Pentafour Software and big names like Videocon International and Arvind Mills. So much so that any spurt in trading volumes in the scrips of any company sparks off takeover rumours.

Investment and merchant bankers see a lot of opportunities emerging in the mergers and acquisitions (M&A) business. For the first time, the country will have "white knight" funds to prevent takeover threats. "Rationalisation of Indian industry has long been on the cards and the mechanics have to fall into place," says Shaune Browne, CEO of HSBC Capital Markets. Both Citibank and HSBC have reportedly applied to the RBI to set up a $1 billion fund each devoted to M&A. Reliance Industries has set up a Rs 500 crore fund for acquisitions.

The conditions seem just right for some serious dealmaking. Besides cheap companies on the block, a variety of factors may trigger a full-scale M&A mayhem.

Big is beautiful: From sugar to cement, white goods to pharmaceuticals, the compulsions for consolidation are increasing by the day. Take pharmaceuticals: 20,000 units with even the market leader having only a 5 per cent marketshare. But with a strict patent regime looming, companies need the critical mass to be able to step up research.The Indian cement sector comprises hundreds of units. The top 20 players control 80 per cent of the market, against three to four players owning 80 per cent in Southeast Asia. Cement prices are dropping fast and the only way to grow is to get better and faster efficiencies of production and distribution. Ditto for sugar. A shakeout is imminent in the south as a handful of companies like EID Parry, Nagarjuna, Udayar and Rajshree groups that have managed to keep afloat are looking to gobble others like Gayatri Sugar, Aruna Sugar and Cauvery Sugars. In steel, overcapacity and international prices are taking a toll on smaller units. In practically every sector, weaker players are likely to be run over as the biggies increase the economies of scale, marketshare and brand power.

Desperate sellers: Even elite business groups are today desperate to sell off non-core businesses as profitability and margins are under squeeze in every industry. The Tatas exited cosmetics and pharmaceuticals in a fortnight. RPG is looking for a quick retreat from Benninger India and Basic Teleservices. Raymond is concluding a deal to sell its steel division to Thyssen of Germany. Voltas is shifting focus from white goods to engineering and air-conditioning. "Some of these businesses should have been on the block a long time ago. Indian promoters grew big by gorging on licences, cheap loans and diversifying madly. They promoted their children as heirs irrespective of talent. Now many of them have neither the capital, technology nor managerial skills to cope with the new competitive reality. The downturn is forcing them to sell peripheral businesses to raise cash for focus areas," says Browne. "The holding power of the cash-strapped Indian promoter is down. Many are rushing to sell, businesses as diverse as telecom and real estate, steel and cement, thinking that if they do not move out or close a deal, they might not even get a worse deal," says Ashwajit Singh, managing director, Allianz Capital. In that sense, businessmen have no choice. "CEOs are now thinking that doing nothing can be risky. Either they sell out or dilute promoters' equity dramatically. There is no middle road. If other companies grow and you stay the same size, you will become uncompetitive," says Browne. "Some are trying to stay independent. They might succeed as of now. But in five years time they would be wishing they hadn't."

Eager buyers: The concept of replacement cost is fast taking root in the Indian psyche. Companies are realising that it is far cheaper to expand by acquiring other companies in a downturn than by setting up greenfield projects. Thus any company with margins superior to the sector average and able to withstand the recessionary trend is looking for expansion through mergers and acquisitions. In cement, at current prices, companies with capacities of around one million tonnes are available for around Rs 150-200 crore whereas the cost of setting up a one-million-tonne plant would be around Rs 400 crore. So it makes great sense for India Cements to catapult itself to second largest cement company status by trying to buy Raasi Cement. Similarly, Gujarat Ambuja is eyeing Priyadarshini Cements. Fresh thinking:  The fact that there has been a change of guard in the last decade at many large groups, whether it is the Tatas, the Mahindras, or the Aditya Birla group, is also lending some lustre to the M&A route. The new business barons, baptised in hard-nosed western management thinking, carry no emotional baggage. "I am not emotional about any business," says Ajay Piramal, who has built a huge pharmaceutical business primarily through acquisitions. The buzzwords are shareholders' value and entity value. Said Simone Tata last month as she bid adieu to Lakme: "It has been a long and highly satisfactory association...But there is no place for sentimentality since shareholders' interests are paramount to one's feelings." "Till about a year ago such talk was unthinkable. It would be heresy," says Browne. Now many a new boss like Kumarmangalam Birla is looking to the overseas acquisition route to grow.

Transparent law: Adding to all this is the great facilitator—the takeover code. There's no room for the hysteria and stealth of the kind that characterised the days of the Swraj Pauls and Dhirubai Ambanis and their ambitions on Escorts and L&T. "The SEBI takeover code is a well-documented piece of law that makes for transparent takeovers with adequate provision for redressal in case of any deviation," says Ashwajit Singh, managing director, Allianz Capital. Now anyone is free to buy up to 10 per cent of a company's paid-up capital. He must make an open offer for at least 20 per cent more then and if shareholders bite the bait, the company can't block the transfer of shares and the predator can force the existing managements out. Sterlite can thus make a play for Indal without owning a single share of the company. "The technical aspects have been made clear by the SEBI code," he adds. Is corporate India poised to enter a new era of consolidation that will put it in a better position to compete globally? Investment bankers are cautious about the emerging trend. "Only if the government allows weak players to get weeded out can any kind of rationalisation proceed in key areas like the financial or telecommunication sectors," says Ajeya Singh, country head, Lehman Brothers. "The M&A business is in its infancy. The seeds have been sown but the quality of crops is yet to be assessed." "Companies may be cheap but no one acquires a business for its non-performing assets. How many Indian companies really have the financial power to turn predators?" asks R. Sankaran, chairman, Ind Global Financial Trust. "Nobody is going to put good money after bad money. A lot of foreign companies may be looking but they are not buying. Not as yet," says Ajeya Singh. So it may be early days yet.

EVERYWHERE you look, you see more sellers than buyers. What's on sale? Mostly sick or semi-sick companies," says Udayan Bose, CEO, Lazard Creditcapital. Therefore, an Essar Steel can possibly be acquired for only Rs 150 crore, but who is going to buy when even the stronger companies like Tisco and SAIL are not strong enough to look at acquisitions? Ditto the financial sector. There are some 25 small private banks in the south and consolidation is on the cards. But the stronger banks feel they could end up merely bailing out the sick ones. Many of these banks may be saddled with bad loans that they are hesitant to write off for fear of damaging long-term relationships and taking a hit on their balance sheets. In that sense, no buyer is waiting for the fire sale to begin.

As for foreign predators, they face a number of hurdles before they can buy companies. "There is this absurd rule that a foreign company wanting to take over an Indian company needs the approval of the Foreign Investment Promotion Board which in turn needs the approval of the directors of the target company," points out Bose. Besides, predators are wary of other factors:

Dithering FIs: The success of M&A strategies is largely dependent on which way the big five—UTI, LIC, ICICI, IDBI and IFCI—swing in a takeover bid. So far there is little change in their dithering ways. Take the Indian Cements offer. The FIs, as 20 per cent shareholders of Raasi, have been saying that they would subscribe to the offer as the price was "too good to be true". But as shareholders of India Cements, they are talking of "blocking" the offer as the price being paid is "too high" and therefore "detrimental" to ICL shareholders' interest. The reasoning is that ICL should have picked up any other smaller unit for half the price. "It's a classic case of wanting to run with the hare and hunt with the hound and could blow the whole takeover attempt in ICL's face," says an investment banker.

Mess under the hood: There are no two opinions about the fact that most Indian companies are a complex web of cross-holding and murky record-keeping designed to show losses to the tax collectors but profits to the public. This could be a nightmare for the acquiring company. Also the difficult labour laws that make sure that companies cannot be bought for their assets, shut down and the employees sent home. The backlash could be severe. So underneath all the hype, there are several problems that have to be resolved before India's M&A scenario matches the West's. What is happening right now is that the ground is slowly being prepared for the more high-powered deals. Which will surely come, but not so soon.