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 A.T. Kearney-Knowledge@Wharton Study

India Inc. on deal street: certain growth; uncertain value

5
Mergers and acquisition activity involving Indian firms is on the rise
over the last 2-3 years and has caught the attention of the world. The
activity though is still dominated by small deals and restricted to a few
geographies. Though largely driven by growth ambitions and access
to new markets, M&A involving Indian firms is not very different in
terms of its impact on shareholder value, compared to global
benchmarks. Capabilities of Indian firms with respect to M&A are
clearly on the rise and there is a belief that this upsurge is beneficial to
all stakeholders.
The last couple of years have seen heightened activity in the 73% of respondents were keen on executing a deal in the next
mergers and acquisitions space involving Indian firms. While a 18 months.
lot more attention has been garnered by the cross-border
As illustrated by these findings, M&A as a topic of discussion has
acquisitions by Indian companies, the domestic environment has
attracted intense attention and has been the subject of many a
also seen a significant increase in M&A deals. M&A activity by
corporate debate. While a few studies have thrown some light on
Indian firms in 2007 was worth US $43 billion and the CAGR
the growth in activity and the dominant sectors, very few insights
over the past 4 years has been 51%.
are available on the challenges,
drivers, capabilities of players
Figure 1: M&A activity by Indian firms by value and volume
and consequences of this
Note: Deals include phenomena.
Indian legal entities
Value (USD Bn.) Volume (Nos.) as acquirers or As Indian firms target a global
(CAGR 51%) (CAGR 47%) targets i.e. footprint through aggressive
50 1500 completed deals
43 that are domestic,
inorganic means, they end up
1250 cross-border facing numerous issues. What
40
outbound and should be the role of M&A in
28 1000 cross-border
30 their growth strategy, what
inbound
750 factors should go in identifying
18 2007 data up to
20 782 targets, assessing and arriving at
12 500 April 2007

10 467 the right price, smooth deal

360 250 Source: Deal execution and post-deal
213 Tracker Annual
0 0 issue 2006, (Grant integration of the new business
2004 2005 2006 2007 Thornton), A.T. without disrupting existing
M&A by value M&A by volume Kearney analysis businesses. The acid test
eventually lies in extracting the
desired value from the
Large cross-border mergers and acquisitions in recent months acquisition and getting recognized by the investors.
include Tata Steel's $8 billion acquisition of the Anglo-Dutch
In order to provide some insights into the M&A behavior of
firm Corus, Vodafone's purchase of India's second biggest
Indian firms, A.T. Kearney and Knowledge@Wharton, joined
mobile phone services provider, Hutchison Essar and Aditya
hands to conduct a study of the mergers and acquisitions
Birla Group company Hindalco's takeover of Canadian
involving Indian firms. The study was conducted in the 2nd
aluminium products maker Novelis. An online survey conducted
and 3rd quarters of 2007. This paper summarises the findings of
by A.T. Kearney and Knowledge@Wharton revealed that
the study.
interest in further deals is high; as many as 42% of the
respondents were “very interested” and another 34% were We expect the insights gained from this study to drive further
“somewhat interested” in conducting a cross-border acquisition. knowledge, and help Indian companies get better at M&A.

2
Objectives & Methodology

Objectives
The purpose of the study was to get quantitative and qualitative insights on the following questions:
1. Scale and scope: Is the M&A activity really significant? Is it restricted to a few sectors and geographies or is it more broad
based?
2. Drivers: What are the major drivers of this activity? Do these drivers differ across domestic and cross-border M&A?
3. Capabilities: Are Indian firms becoming better across the deal lifecycle: pre-deal, during deal and post-deal? Is there any
unique Indian style?
4. Challenges: Is the domestic environment conducive for M&A? Do Indian firms face any significant challenges in cross-
border deals?
5. Value creation: Are Indian firms overpaying? Is there net value-creation due to M&A?

Scope
The study covered all deals where an Indian Firm was involved either as an acquirer, acquired or in a merger.
However given the relatively fewer acquisitions of Indian firms that have happened (with exceptions like the
Vodafone-Hutchison Essar), the findings are more representative of deals where Indian Firms have been
acquirers either in cross-border deals or domestic deals.

Approach and Methodology

The study involved the following:
1. Analysis of data pertaining to the M&A deals between 2004-April 2007. Data was derived from reputed databases like
Thomson One Banker, Bloomberg and compilation done by Grant Thornton.
2. Indepth interviews with CEOs of companies active in M&A.
3. Survey of senior executives from 178 Indian companies conducted by Knowledge@Wharton.
4. Deliberations of the M&A forum held on July 12, 2007 in Mumbai India, wherein over 25 senior executives of Indian and
Multinational companies, Banks and Private Equity firms participated in the discussions on the following four themes:
 M&A as a growth strategy
 Choice of targets
 Challenges to overcome
 Post deal value creation challenges

Definitions
The following are the definitions/meanings of most commonly used words in this paper:
 “Indian M&A” refers to M&A deals involving Indian Firms.
 “Deal” refers to any acquisition of stake by another company including a Private Equity investor, whether
majority/minority with investment or control motive.

3
Indian M&A is on the rise, albeit small by global standards
Mergers and acquisitions (M&A) have become attractive options
in recent years for Indian companies pursuing growth in both the
domestic and international markets. Low-cost operating
environments back home in India and strong balance sheets with
potential for leveraging make Indian firms ideal acquirers in
many cases.
Cross border M&A activity is also growing and over three
quarters of Indian companies studied showed an interest in it and
over 50% of these companies predicted their firm would be
involved in a cross border M&A within one year.
Analysis reveals that Indian M&A activity has only picked up
in the last four years, during which time it has doubled its share
of global M&A deals. However, it still forms only 1.49% of the
Global M&A activity.

Fig 2: Share of Indian M&A activity in global M&A activity by value

(%)

(USD Bn.)
1740 2060 3700 2880 Note: Deals include Indian
legal entities as acquirers or
targets i.e. completed deals
that are domestic, cross-
border outbound and cross-
border inbound data up to
0.71% 0.89% 0.76% 1.49% (India’s April 2007
share of
Global)
Source: Deal Tracker
12.3 Annual issue 2006, (Grant
43.0
18.3 28.2 Thornton), A.T. Kearney
analysis

2004 2005 2006 2007

India Rest of the world

Analysis of data also revealed that Banks & Financial Services and IT/ITES tend to be the most active sectors in M&A activities.
Telecom, Energy, Oil & Gas sectors lead M&A in terms of deal value sizes (largely explained by the size of a few large deals).

Fig 3: Sector share in deals by value and volume

Total number of deals sector wise (2005 to 2007)1 Average deal value (US$Mn) sector wise (2005 to 2007)1

7 16 30 Telecom 858 1937 75

11 18 34 Energy, Oil & Gas 344 152 183

18 24 73 FMCG, Food 205

& Beverages
14 22
21 27 73 Manufacturing1 2149
9 10
Construction/ 11
11 36 74
Real Estate
58
55
29 32 59 Pharma, Biotech & 64 132 Domestic
Health care
13
Cross - border inbound
60 51 89 IT/ITES 152
44
Cross - border outbound
8
17 69 142 Banks & 112
74
Financial Services2
41
Note: (1) Sector classification is based on sector of the target firm; data for completed deals consolidated for 2005, 2006, 2007(until May)
(2) Banks & Financial Services includes banks, brokerage firms, credit institutions, asset management companies and insurance companies
Source: Thomson One Banker – Deals Database, A.T. Kearney analysis

4
Indian M&A is driven by the desire for growth and market dominance
In the macro-economic environment in India, there is one resounding emotion - growth. Our study also finds that the growth ethic is at
the heart of Indian M&A. Analysis of the deals over 2005-2007 shows that a significantly higher number of deals occur in sectors that are
in the growth phase1 of their life cycle.

Fig 4: Linkage of M&A activity with industry life-cycle (% of total number of M&A deals accounted for by sector)

Introduction Growth Maturity

14.69%
12.89%

7.80% 7.41% 7.73% 7.80%

6.57% 6.44%
5.80%

3.61% 3.93% 4.06%

3.41%
2.71%
1.74%

Services

Telecom

Energy, oil & gas

IT/ITES

Manufacturing
FMCG, Food &
Beverages

Textiles
Electronics

Services

Healthcare &

Chemicals
Transportation

Construction/

Banks & Financial

Pharma,

Biotech
&

Real Estate

Automotive
Entertainment
Media

,
i

Notes: Criteria for assessment of industry maturity: (A) Growth rate analysis, (B) Penetration of market, (C) Competitive scenario
Source: Thomson One Banker – Deals database, Bloomberg, A.T. Kearney analysis

Drivers of mergers and acquisitions can be very different Fig. 5: Survey results - Reasons for looking at
cross border M&A
depending upon the industry and firm specific factors. M&A can
provide a stimulus to growth, enable market dominance in a slow
growth market, enlarge geographical/product/domain footprint
or also provide opportunities for enhancing the bottomline
through better synergies, reduced overheads and a more efficient 4% Internal growth
capital structure. Executives interviewed cited geographic aspirations
expansion, product line extension, gaining access to new
31%
technology and business diversification as the top four reasons
Lack of suitable
for choosing an overseas acquisition target. targets within
Our analysis shows that cross-border acquisitions by Indian
firms are clearly driven by growth and market access
Visibility of
considerations. Globalisation in most industries has created
57% opportunities due
greater visibility for Indian firms; they are now more aware of 8% to globalization
opportunities in global markets. 57% of respondents cited
“visibility of opportunities due to globalization” as the major Over-active
reason for looking at cross-border deals. investment
bankers

Source: A.T. Kearney analysis

1
Assessment of the maturity of a sector is based on sector growth rate, market penetration and competitive intensity

5
A cross border deal allows immediate access to a new market A smaller proportion of deals are driven by the contradictory
where building a business organically may take either very long, desires to grow, yet not disturb the market equilibrium. In some
be very expensive or completely infeasible if the market of the mature sectors in the domestic market, like cement and
is stagnant/has slow growth. Executives interviewed said chemicals, capacity needs to be added in quantum steps or
“sometimes acquisition is the only route to growth”. In case of substantially but sudden capacity addition could adversely affect
technology firms, access to a new product or technology allows it the demand-supply situation hurting the existing business in the
to immediately leverage over a large existing customer base. Most
short-term. In such situations, acquisition of available surplus
of the cross-border deals in Pharma, Engineering, IT are driven
capacity adds to the topline and asset base with minimal impact
by these considerations. Access to mature markets like the US or
on the market dynamics. Acquisition could thus be the only
Europe is well nigh impossible except through the inorganic
possibility of growing faster than the industry.
route. A similar logic is also emerging in high growth sectors in
India, where new entrants (or those who want to establish their In other domestic sectors such as forgings (where Mahindra and
footprint rapidly or are catching up on lost time) find acquisitions Mahindra has made several acquisitions) or banking (where
an attractive option. Centurion Bank has executed a series of mergers), having
a strong brand name and access to customers allows
A variation on the theme of market access could be the
the firm to better leverage new assets than the existing promoters
acquisition of select capabilities (technology, product-range,
or even competitors. Their ability to extract value out
processes, people), which allows the player to compete in a new
of the deal is then a lot better. Executives interviewed pointed
segment of the market. Tata Motors' acquisition of Daewoo
out the existence of surplus/underutilized capacity in some
Commercial Vehicles in early 2004 is a prime example of a
sectors like banking, petrol retailing, engineering goods as
strategy to gain entry into the market for higher horsepower
a legacy of the regulatory regime that controls asset creation
trucks. Other examples include Amtek Auto's purchase of
but does not punish/penalise underutilization. Market leaders
German firm Zelter giving it a technological edge in automotive
are also not averse to acquisitions to retain dominance or to
component manufacturing, and Wipro securing domain
“edge-out competition”.
expertise in business services management with its acquisition of
cMango in early 2006.

Tata Steel – creating a global value chain

The interplay of various drivers for acquisition is best illustrated in the growth strategy of Tata Steel. Tata Steel figured
that primary steel will be made in countries like India that have iron ore and coal and will be finished in developed
countries that are big markets and which allow premium pricing. According to Tata Steel, an integrated model of trying to
make everything in one place – is unlikely to be feasible. Countries like Japan that import iron ore and coal to make their
steel are not going to remain competitive for very long. Tata Steel believes that a fragmented steel value chain across
the world will allow companies to make primary steel where it is cheapest to make and finish it in countries where it will be
consumed.
This belief drove a two-pronged growth strategy. To take advantage of low-cost iron ore and coal in India, Tata Steel
planned greenfield projects in Orissa, Chhattisgarh and also in neighbouring Bangladesh. The acquisition of NatSteel
was with intent to make the semi-finished steel in India, roll it, finish it and sell it in Singapore. The acquisition of London
based Corus was likewise driven by the belief that being in a mature high-cost country, Corus cannot make primary steel
for too long at a competitive cost.
Access to technology was also a key driver for its acquisitions. With Corus, for example, technology was a major
consideration.

6
Fig. 6: Growth is the dominant driver of M&A

Growth Profitability

Market Power Competency / Capability Economies of Scale/Scope Financial Reengineering

• Market Share • Technology know - how • Better asset utilization • Tax Benefits
• Pricing Power • Domain expertise • Negotiating power • Capital Structure
• Product Mix • End - to - end Control • Reduce resource duplication • Reduced working capital
• Market Access • Sharing Best Practice • Unused debt capacity
• Brand / Visibility

Transportation Automotive Manufacturing

• Jet Airways’ acquisition of
Sahara to gain market
leadership
Manufacturing
• Hindalco’s acquisition of Novelis
for market access
• Tata’s acquisition of Daewoo
trucks to gain entry into the higher
HP truck market
• Amtek Auto’s acquisition of
German firm Zelter to gain
technological edge in automotive
component manufacturing
• Holcim India’s acquisition of Gujarat
Ambuja Cements to improve operating
efficiency and 15-million-tonne capacity
Energy, Oil & Gas
• Tata Power’s acquisition of Coastal
Gujarat Power to add capacity

Pharmaceuticals IT/ITES
• DRL’s acquisition of Betapharm • Wipro’s acquisition of Mango Inc
and Ranbaxy’s acquisition of to gain domain expertise in
Terapia for global reach business service management

Source: A.T. Kearney analysis

On the other hand, examples of M&A for achieving economies
of scale and scope are few. This is very different from what is
observed in mature markets, where economies of scale and
scope (better asset utilization, reduced duplication of resources,
enhanced negotiating power and sharing of best practices) are
the biggest driver for M&A. An example is Holcim India's
purchase of Gujarat Ambuja Cement as a quick route to
improving its overall operating efficiencies, and a capacity
addition of 15 million tonnes.
Another driver found in mature markets is financial
reengineering rightsizing the capital structure (tapping surplus
debt capacity at the acquired company), leveraging tax
advantages and reduced working capital. All of these allow a
better return on equity driving up valuations. Study did not find
evidence that financial engineering is a major driver of M&A for
Indian firms, at least at this stage.

7
Building is cheaper, but who has the time?
Most Indian firms have grown by building their businesses brick
by brick. Given the steep increase in valuations recently, in the
domestic market, building a new business turns out to be far
cheaper than buying. So why this sudden frenzy for buying
businesses, when in many industries, the companies bought do
not really have world class capabilities? Executives across the
board cite the need for speed to market as the major driver for
“buy” winning over “build”.
Buying is more attractive when time to market and access to
capabilities is critical. Hindalco's (Aditya Birla Group) US $6
billion acquisition of Novelis was driven by the need to obtain
access to markets, assets and management skills “that would take
many, many years to replicate”. Novelis instantly enabled
Hindalco to control nearly 20% of the global market for rolled
aluminium products. Conglomerates entering new businesses
tend to acquire start-up businesses to get an understanding of
how the business works (e.g. Aditya Birla Group's acquisition of
Trinethra, a 172 store food and grocery chain in South India).
However such options are not too many and once the top
handful are acquired, the others have no option but to build from
zero-base.
In the case of an outsourcing services firm it acquired about a
year ago, the Aditya Birla Group found an opportunity to extract
Value focused companies tend to be more acquisitive
We also explored if there is a difference in the acquisitive behavior
of firms based on their propensity to chase value versus growth.
Based on whether a company is focused more on revenue growth
versus a growth in market value, all companies can be classified
into simple growers, efficiency seekers, value growers and
underperformers. As shown in Fig. an analysis of 2206 listed
Indian companies reveals that around 20% fall in the value
growers and efficiency seekers quadrants - companies which are
focussed on value. On probing deeper into the composition of
8
gains by merging operations. Its group firm TransWorks was
primarily a call-center operation with about US $50 million in
revenue, but it moved up the value chain when it bought
Canadian company Minacs Worldwide for US $125 million.
Minacs had revenues of US $300 million, but because it was
operating in North America, its valuations were not very high.
Minacs brought access to customers and a front-end that was
closer to them, while TransWorks had back-end operations in
India that gave a competitive edge.
Building tends to be an attractive option in cases where time to
market is less important than long term cost advantages and in
service industries where the loss of people can erode the value of
the company completely.
As more and more Indian companies set their sights on foreign
markets, the best route is clearly to “buy” instead of “build,”
according to Akhil Gupta, chairman and managing director of
Blackstone Advisors India, the Indian arm of private equity firm
The Blackstone Group. A company considering an overseas
acquisition target should evaluate it “in terms of buying time,” he
said, and not just according to potential returns from the
investment. “The opportunity cost of not being where you want
to be can be pretty significant. That's one of the reasons we
should do an M&A [deal].”
these value focussed companies, we find a clear difference in the
acquisitive tendency of this group. Of these 2206 companies, the
percentage of companies which have been involved in some
acquisition is highest in the value growers followed by the
efficiency seekers. By contrast, the percentage of such companies
is much lower in the simple growers and underperformers.
The evidence indicates that there is a clear acquisition bias
amongst the companies focused on value growth.
Fig.7: Growth Performance Segmentation1 and Acquisitive tendency2

Q2 Q1

Simple Value
Growers Growers 18.6%
Revenue Growth 18%

19.13% 20.13%

38.1%

16.0%

Under Efficiency
Performers Seekers
27.3%
40.39% 20.35%

Q4 Q3
Simple Growers Underperformers
70% Value Growth Efficiency Seekers Value Growers

Acquisitive tendency - share of acquisitions

Note: (1) Data for 2,206 listed companies analyzed over a 3-year period; percentage figures for Q1,Q2,Q3,Q4 indicate the companies falling in
each quadrant; The analysis of each quadrant is based on a sample of companies falling in that quadrant
(2) Acquisitive tendency is measured as the percentage of listed companies who have engaged in any acquisition activity (completed/
pending) during the period of analysis
Source: Prowess, CMIE; Reuters; Thomson; A.T. Kearney analysis

Small deals dominate the landscape

Target firm and deal size
Cross border M&A activity of Indian firms over the recent past
has been dominated by acquisition of small firms. While popular
perception is created by a few large headline-grabbing deals, the
bulk is made up of deals much smaller, and hence, sometimes not
known. Most of the companies surveyed (54% of all
respondents) said that they are likely to make acquisitions of
firms that are below US $50 million. Analysis of deals done
between 2005 and 2007 shows that both the value of the M&A
deals and the turnover of the acquired firms has been low.

Fig. 8: Distribution of no. of deals by value of deals (2005 - 2007)(1) Fig. 9: Distribution of target firms by turnover (2005 - 2007)(1)

(%) (US$Mn) % of Deals

82.7%
64.32%

20.87%

8.74%
5.9% 5.9% 2.67%
2.3% 1.3% 0.6% 1.3% 1.94% 1.46%

0-50 50-100 100-250 250-500 500-750 750-1000 1000+ Less than $100- $250- $500- $1000- >$1500Mn
Value of the deals (USD Mn) $100Mn $250Mn $500Mn $1000Mn $1500Mn

Note: Deals include Indian legal entities as acquirers or targets; (1) 2007 data for half year
Source: Deal Tracker, annual issue 2006, Grant Thornton report

9
Building is cheaper, but who has the time?
Most Indian firms have grown by building their businesses brick
by brick. Given the steep increase in valuations recently, in the
domestic market, building a new business turns out to be far
cheaper than buying. So why this sudden frenzy for buying
businesses, when in many industries, the companies bought do
not really have world class capabilities? Executives across the
board cite the need for speed to market as the major driver for
“buy” winning over “build”.
Buying is more attractive when time to market and access to
capabilities is critical. Hindalco's (Aditya Birla Group) US $6
billion acquisition of Novelis was driven by the need to obtain
access to markets, assets and management skills “that would take
us many, many years to replicate”. Novelis instantly enabled
Hindalco to control nearly 20% of the global market for rolled
aluminium products. Conglomerates entering new businesses
tend to acquire start-up businesses to get an understanding of
how the business works (e.g. Aditya Birla Group's acquisition of
Trinethra, a 172 store food and grocery chain in South India).
Such options are not too many and once the top handful are
acquired, the others have no option but to build from zero-base.
In the case of an outsourcing services firm it acquired about a
year ago, the Aditya Birla Group found an opportunity to extract
gains by merging operations. Its group firm TransWorks was
Fig.7: Growth Performance Segmentation1 and Acquisitive tendency2
Q2 Q1
Simple Value
Growers Growers
Revenue Growth 18%
19.13% 20.13%
Under Efficiency
Performers Seekers
40.39% 20.35%
Q4 Q3
70% Value Growth
Note: (1) Data for 2,206 listed companies analyzed over a 3-year period; percentage figures for Q1,Q2,Q3,Q4 indicate the companies falling in
each quadrant; The analysis of each quadrant is based on a sample of companies falling in that quadrant
(2) Acquisitive tendency is measured as the percentage of listed companies who have engaged in any acquisition activity (completed/
pending) during the period of analysis
Source: Prowess, CMIE; Reuters; Thomson; A.T. Kearney analysis
8
primarily a call-center operation with about US $50 million in
revenue, but it moved up the value chain when it bought
Canadian company Minacs Worldwide for US $125 million.
Minacs had revenues of US $300 million, but because it was
operating in North America, its valuations were not very high.
Minacs brought access to customers and a front-end that was
closer to them, while TransWorks had back-end operations in
India that gave a competitive edge.
Building tends to be an attractive option in cases where time to
market is less important than long term cost advantages and in
service industries where the loss of people can erode the value of
the company completely. Value growers seem to handle
acquisitions very carefully lest they destroy the value that they paid.
As more and more Indian companies set their sights on foreign
markets, the best route is clearly to “buy” instead of “build,”
according to Akhil Gupta, chairman and managing director of
Blackstone Advisors India, the Indian arm of private equity firm
The Blackstone Group. A company considering an overseas
acquisition target should evaluate it “in terms of buying time,” he
said, and not just according to potential returns from the
investment. “The opportunity cost of not being where you want
to be can be pretty significant. That's one of the reasons we
should do an M&A [deal].”
18.6%
38.1%
16.0%
27.3%
Simple Growers Underperformers
Efficiency Seekers Value Growers
Acquisitive tendency - share of acquisitions
Value focused companies tend to be more acquisitive

We also explored if there is a difference in the acquisitive behavior
of firms based on their propensity to chase value versus growth.
Based on whether a company is focused more on revenue growth
versus a growth in market value, all companies can be classified
into simple growers, efficiency seekers, value growers and
underperformers. As shown in Fig. an analysis of 2206 listed
Indian companies reveals that around 20% fall in the value
growers and efficiency seekers - companies which are focussed on
value. On probing deeper into the composition of these value
focussed companies, we find a clear difference in the acquisitive
tendency of this group. Of these 2206 companies, the percentage
of companies which have been involved in some acquisition is
highest in the value growers followed by the efficiency seekers. By
contrast, the percentage of such companies is much lower in the
simple growers and underperformers.
The evidence clearly indicates that there is a clear acquisition bias
amongst the companies focused on value growth.

Small deals dominate the landscape

Target firm and deal size
Cross border M&A activity of Indian firms over the recent past
has been dominated by acquisition of small firms. While popular
perception is created by a few large headline-grabbing deals, the
bulk is made up of deals much smaller, and hence, sometimes not
known. Most of the companies surveyed (54% of all
respondents) said that they are likely to make acquisitions of
firms that are below US $50 million. Analysis of deals done
between 2005 and 2007 shows that both the value of the M&A
deals and the turnover of the acquired firms has been low.

Fig. 8: Distribution of no. of deals by value of deals (2005 - 2007)(1) Fig. 9: Distribution of target firms by turnover (2005 - 2007)(1)

(%) (US$Mn) % of Deals

82.7%
64.32%

20.87%

8.74%
5.9% 5.9% 2.67%
2.3% 1.3% 0.6% 1.3% 1.94% 1.46%

0-50 50-100 100-250 250-500 500-750 750-1000 1000+ Less than $100- $250- $500- $1000- >$1500Mn
Value of the deals (USD Mn) $100Mn $250Mn $500Mn $1000Mn $1500Mn

Note: Deals include Indian legal entities as acquirers or targets; (1) 2007 data for half year
Source: Deal Tracker, annual issue 2006, Grant Thornton report

9
This is true for all sectors in both cross border and domestic M&A. The reason is not hard to fathom. Indian acquirers tend to be much
smaller than the global average and hence except for a few exceptions who go for companies that are as big as them or larger, most deals
tend to be small in size.

Fig. 10: Average size of acquiring and target firms, 2005-2007 Fig. 11: Average size of target firms by sector wise (US$ Mn.)

Size of Target Size of Acquirer

(US$ Mn) (US$ Mn)
469.7
19,815 2,656 20,000

207 375.0

200 191
176 15,000
167 302.0
12,558

10,000 211.4
197.2
8,600 179.4 171.8
100
128.2
63 120.7 117.9
5,000 107.4 99.1
77.8
39.6
974 1,147 27.0 22.4
711
0 0
Telecom

Hospitality & Tourism

Manufacturing
Automotive

Others

Media & Entertainment

Electronics

Energy, oil & gas

Beverages

Pharma, Healthcare
Transportation

& Biotech
FMCG, Food &
Chemicals

IT/ITES
Estate
Construction/Real

Textiles
Services
Banks & Financial
2005 2006 2007
Domestic targets
Cross-border targets
Indian acquirers
Overseas acquirers(Cross-border inbound)

Note: (1) The deals included are only those that have either an Indian acquirer or an Indian target; overseas acquirers acquiring overseas targets
are excluded Data for 2005, 2006, 2007 (until May 2007)
Source: Thomson One Banker – Deals database, Bloomberg, A.T. Kearney analysis

The average size of the target also tends to be small across sectors. The average size of the target company was the biggest for automotive
firms at $470 million. Telecom firms ($375 million) and electronics firms ($302 million) were the next most popular targets, while media
& entertainment firms had an average target size of $22.4 million. Other industries between the two ends included chemicals,
manufacturing, energy, IT and IT-enabled services (ITES), pharmaceutical, health care and hospitality/tourism.

10
Anglo-Saxon countries are popular hunting grounds

Legal and regulatory environments in the country of the target
firms pose the biggest challenge before and during the deal.
Unfamiliar and different legal environment in countries like
China and Russia make these geographies relatively unattractive
compared to US or UK.
Companies surveyed indicated that North America and West
Europe are the most preferred locations for targets of Indian
firms. This is followed by South East Asia and South Asia.
Overall it was found that familiar language and similar legal
system made Anglo-Saxon countries2 more attractive for
acquisitions. In 2007, 56% of the 41 cross border deals were of
Anglo-Saxon targets. As can be seen from Fig. 12, while countries
like Germany and China are larger (in terms of GDP), the
number of deals are fewer than in UK.

Fig 12: Anglo-Saxon bias in cross-border acquisitions

Target Countries for Cross Border Acquisitions 2005 - 2007 Proportion of Anglo - Saxon2 acquisitions in total cross border
acquisitions (%)

(% of Acquisitions)

US 43%
(No. of deals) 83 114 41
Germany 7%
China 2%
Increasing order of GDP

UK 19%
49% 44%
France 2% 51%

Canada 3%
Spain 2%
Australia 4%
Belgium 4%
Thailand 4% 51% 49% 56%
Singapore 8%
New Zealand 3%

0% 10% 20% 30% 40% 50% 2005 2006 2007

% of acquisitions country wise Anglo Saxon deals Other cross border deals

Note: (2) Anglo-Saxon countries include US, Canada, UK, Australia and New Zealand
Source: Thomson One Banker-Deals Database, Industry interviews

Executives interviewed pointed out the difficulties involved in Compared to developed countries like US and Germany, the
doing deals in countries like China where the legal system is very business environment in India and China is less attractive on the
different and cultural differences make it difficult to close a deal. following four parameters:
Those who had done deals in Central and Eastern Europe also  Laws and regulations governing M&A
pointed out the restrictive labor environment (much stricter than
in India) in these countries as a serious challenge.  Rules for foreign buyers

M&A in India has been difficult due to the restrictive regulatory  Availability and transparency of information
and fiscal environments. Delisting companies is not easy, nor are  Access to finance and investor protection
Leveraged Buy-Outs, while Private Equity players are restricted to  Taxation laws
growth capital and banks have little role to play in financing
acquisitions. Companies find it easier to execute cross-border deals.

11
Fig. 13: Characteristics of business environments in various countries

5 Favourable for M&A

1 Not favourable for M&A USA Germany China India

Laws and regulations for M&A Overall Overall Overall Overall

• Existence of Laws 5 5 4 4
• Comprehensiveness of Laws 4 4 3 3
5 5 3 4
• Enforceability of Laws 5 5 2 3
• Statutory Bodies overseeing M&A activity 5 5 3 4

Rules for foreign buyers

• Coverage under M&A related laws 4 3 2 4

• Degree of regulation for foreign buyers 3 3 4 4 3 2 3 3
• Degree of enablement/ concessions 3 4 2 3

Availability and transparency of information and related

documentation

• Exhaustiveness of documentation required 5 4 3 3

• Authenticity of documentation 4 4 5 4 2 2 2 2
• Degree of corporate governance 4 4 2 2

Access to finance and investor protection

• Availability of lines of credit 5 5 2 3

• Availability and reliability of credit information 5 5 3 3
5 5 2 3
• Enforceability of contracts 5 5 2 2
• Recourse to courts of law 5 5 2 3

Taxation Laws

• Degree of corporate taxation 2 4 3 3

• Presence of designated regions for tax concessions 3 3 2 4 4 3 3 3
• Coverage of taxation 5 5 3 3

Source: A.T. Kearney FDI Confidence Index; World Bank Report; Global LegalGroup; A.T. Kearney analysis

Post deal integration challenges

Post deal integration is most critical in order to leverage the value
of the deal. People and cultural integration continue to be the
most important post-deal challenges. Over 57% of people
surveyed said that People and Cultural Integration was the
greatest challenge 3.
Most executives interviewed also pointed out the importance of
structured and time-bound integration (first 90-100 days post
integration) to realize the value of the deal. However in case of
cross-border acquisitions, most companies preferred to leave the
management team in the acquired companies intact (except in case
of family owned businesses, where the family is required to
withdraw completely). Indian firms buy overseas firms for their
capabilities and they work hard to retain the management of the
acquired company. In many cases, executives pointed out how the
Indian operations benefitted from the good practices of the
acquired company. Indian CEOs believe they are “fair acquirers”
and they believe this gives them an edge over other acquirers such
as Chinese. Other challenges include bridging the mismatch
between the labor-capital tradeoffs between Indian and overseas
firms. Further, M&A causes disruption of the normal business and
takes attention away from the core business which is also a cost.
While ‘post deal integration’ is frequently cited as a concern, our
study did not find this to be a significant area of concern.
Arguably, the scale of activity is still small, the real test of
integration will be, if and when Indian firms acquire larger firms
in culturally diverse markets.

3
Challenges surveyed include segment strategy, supply chain, people policies and profiles, systems and processes and culture

12
Capabilities of Indian Firms: On the rise

Indian firms appear to be reasonably confident of their
capabilities for executing M&A deals, both domestic and cross-
border. Most companies have become savvy at using external
agencies (eg: lawyers, investment bankers, management
consultants) for key interventions in the M&A process and most
seem to be generally satisfied with the level of maturity of these
agencies. According to many of them, Indian firms are no longer
treated with skepticism. Instead they are treated as serious players
who have the courage to bid, the necessary deep pockets to fund
and the finesse and skills to conclude a deal. Our study found that
the maturity of Indian firms across the different stages in an
M&A deal is high. Across the deal life cycle we found evidence of
sophistication and incorporation of best practices.
Those companies who have some experience of M&A (have
done at least a couple of deals).

1) Growth strategy formulation and targeted search
 Most Indian firms who have had some experience of
acquisitions, think of inorganic growth as an alternative to
organic growth and are well aware of the trade-offs
involved or the reasons they would look at a deal. The build
versus buy decision is given some thought by most
companies, although companies differ in the rigor they
apply to the process.
 Most of them have a few individuals or a team (size
depends on the acquisitiveness) which evaluates all deals
either walk-in or commission targeted searches.
 Proactive targeted search and walk-ins are of equal
importance to most.
 In the IT and Pharmaceutical sectors, Indian companies
were the first port of call in most deals.
2) Pre-deal Assessment
 Pre-deal assessment has moved beyond pure legal or
accounting due diligence. Companies interviewed had spent
time in improvement in identifying performance
opportunities in the target that would be needed to make
the deal workable.
 Pre-deal assessments conducted included market
assessment, performance gap analysis, financial engineering
possibilities, cultural differences and likely integration issues.
varied. Most common method used was inducting business
managers with the relevant domain knowledge into
cross-functional teams.
 While there was wide variation in the rigor applied in this
stage across firms, it was found that the credibility of
Indian firms was increasing
3) Valuation and Negotiation
 Few companies had a very rigorous policy on valuation and
negotiation. Most started off with an offer they could
defend but where the deal closed often depended on how
hands-on the CEO was in the deal-making. Sometime it is
“a CEO game all the way”.
 By their own admission, Indian companies are
hard bargainers.
4) Post Merger Integration
 We encountered a lot more familiarity with best practices in
merger integration, than we found in other elements of the
M&A life cycle.
 90-100 day integration plan was a common find, as were
practices like town-hall, dedicated cross-functional teams,
cross-teams and use of consultants.
 Indian firms left the local management teams intact, except
introducing a couple of their “own” people to retain
controls on finance and operations.

Sumant Sinha, CEO, Aditya Birla Retail was convinced that perceptions about Indian management not
making the grade have been put to rest. “Indian talent is second to none, many Indians have thrived in difficult
and unfamiliar conditions. Indian corporations also discovered that their conservative past left them with
substantial leveraging space to fund their growth aspirations” he added.

13
Benefits Case: Deal valuation, propensity to overpay and value creation
The final and most important question to be explored is the
benefits case. Has all the M&A activity resulted in net benefits for
all stakeholders?
Going by the perceptions of the respondents to our survey, there
seems to be widespread optimism about the benefits to the
Indian economy and all stakeholders. 81% of the respondents
feel optimistic about the benefits to be derived from the
increased M&A activity.
Fig.14: Results of survey benefits from M&A
4% 1%
14%
Yes, very good
38% Yes, reasonably good
Neither good nor bad
No, fairly bad
No, extremely bad
43%
However the crucial test of benefits would be to evaluate if the
M&A activity is leading to enhanced shareholder value.
In developed economies (USA for example), M&A is clearly
driven by the stated desire to enhance shareholder value.
However even in these mature economies, research on the
linkage between M&A and value creation is not entirely
conclusive. Using the average abnormal stock4 market reaction at
merger announcement as a gauge of value creation or
destruction, a study by Andrade, Mitchell and Stafford in 2001,
found that mergers create value for their shareholders. The
underlying assumption is that in a capital market that is efficient
with respect to public information, stock prices quickly adjust
following a merger announcement, incorporating any expected
value changes. Further, the study also found, while mergers seem
to create value for shareholders overall, but the announcement-
4
For a full discussion on this topic, please read “New Evidence and Perspectives on Mergers”, Gregor Andrade, Mark Mitchell,
and Erik Stafford, Journal of Economic Perspectives, 2001, vol. 15, issue 2, pages 103-120.
5
Data for a sample of ~50 largest global deals and ~25 largest deals involving Indian firms, over 2005-07. Premium paid is
percentage by which final price per share was higher than stock price of acquired firm on the day of the final bid.
14
period gains from mergers accrue entirely to the target firm
shareholders. Financing also has a significant impact on
inferences about overall value creation from mergers - stock-
financed mergers do not increase overall shareholder value. The
results are positive for mergers financed without any stock.
Studies on longer term benefits to shareholders have suffered
from methodological difficultiesand are inconclusive.
In India, given the relatively lower maturity of the stock markets,
even this metric may not be best indicator of the value creation
potential of a deal. Despite the above limitations, for the purpose
of understanding this crucial aspect of the M&A behavior, in the
absence of any other measurable metric, we have relied upon the
stock market reaction as an indicator of likely value creation.
Applying this method of estimating the value creation from M&A
deals5, the data presented in Fig 13, points out that the behavior of
Indian firms is marginally better than the global average. The
market perceives a value creation possibility in 87% of the Indian
deals, compared to 85% in case of global deals.
Secondly, on the question of who gains from the deals - the
acquirer or target, while globally it has been established that the
benefits of mergers typically accrue to the target company, in
case of Indian companies, the sample data seems to indicate that
the benefits are more equitably shared between the targets and
the acquirers (Fig. 15). Compared to 50% of the cases where the
acquirer appears to have overpaid, in case of Indian deals, the
number is a shade lower at 44%. While in 35% of global M&A
deals the acquirer had paid a moderate price, in 42% of Indian
M&A deals, the acquirer had managed to pay a moderate price.
Interestingly, we found that there were no acquirers either
globally or within India that actually underpaid for their targets.
Notwithstanding the above, the general perception amongst
industry seems to be that Indian firms are at the risk of
overpaying. This concern has its genesis in some of the large
deals where it is perceived that the acquirer has paid huge
premium.
Getting the right price in a deal is a function of several factors
including timing, the opportunity cost of not doing the deal, and
negotiation skills.
Propensity to overpay: Indian firms are marginally better than their
global peers

Fig. 15: Propensity to overpay: Indian and Global firms

up
Acquirer underpaid, Acquirer paid moderate price,
Direction of Acquirer firm’s stock price post-acquisition

Value likely to be created Value likely to be created

42% of
Acquirer over paid,
Value less likely to be created
Global Firms
Note: (1) Data for a sample of
Indian Firms
35% of ~50 largest global deals and
deals deals ~25 largest deals involving
Indian firms, over 2005-07
Premium paid is percentage by
which final price pershare was
Acquirer overpaid,
higher than stock price of
Value likely to be created
acquired firm on the day of the
final bid

Source: Bloomberg; A.T.

14% of 15% of 44% of 50% of Kearney analysis; Industry
deals deals deals deals interviewsGlobal

down
down up

Direction of Acquired firm’s stock price post-acquisition

Industry executives defend the high prices that they have paid in There is also a perception that the confidence exuded by Indian
some cases based on their strategic priorities e.g. the opportunity companies in the global M&A marketplace is perhaps causing
cost of not doing the deal, alternatives available to them, their prices to become inflated. According to Dhanpal Jhaveri of
ability to extract value or the premium they place on growth. Vedanta Resources, “You have to be worried about paying more
According to one of them, “Paying a little more is a question of value than the deal deserves.”
what reference point you want to take.” Still others recommend a However the general consensus on the issue of value creation
portfolio approach to spread and diversify the risk. seems to be that the game has just begun and hence it may be too
Quite a few others have sounded the warning bells. Most of the early to ask this question. What is done with the acquisitions over
big-size deals and volumes are found in the outbound M&A the next few years will determine if the price was right. There is
activity of Indian companies, according to Rajeev Gupta, also the question of looking at value creation itself
Managing Director, Carlyle Group. Extracting value from those in two diametrically opposite ways: “the American way of
deals is a big challenge, he said, because the average daily global looking at the share price after the deal is done,” while the other
deal volume of $75 billion to $80 billion tends to drive prices up. extreme is the Japanese model, “which is looking at value on
Indian acquirers will find that pricing latitude is hard to find when the 25th anniversary of the deal.” With growth being the
more dominant motive amongst the Indian acquirers, value
they chase targets in the developed markets, he added. “You are
creation for shareholders is at best a secondary objective, at least
not going to find ignored stock held by widows who are
at this moment.
desperate to offload it. When you pay that kind of premium, the
question is how to extract value.” Clearly this is one area, where
Indian firms will need to watch out.

15

Conclusion
In conclusion, we find that M&A is an integral part of the growth
strategy of Indian firms. Companies focused on shareholder
value tend to be more acquisitive compared to others. The
trend seen over the last two - three years (many small deals
with most them being focused on a few geographies with
favourable and/or familiar environments), is expected to
continue in the near term.
The restrictive regulatory environment has not helped the
domestic M&A activity, so far. However, the pace of both cross-
border and domestic M&A is going to increase and shows no
sign of subsiding in the foreseeable future. We found Indian
firms to be mature in their M&A capabilities and marginally
better than the global average in terms of value creation and
propensity to overpay.
16
Five Imperatives for India Inc.
on deal street
There are several areas where the Indian firms and the
enabling ecosystem need to focus to sustain the momentum
generated:
1. Broadbasing the M&A basket: While the large mature
markets of the west may be attractive today, there is lot that
has not been explored in other high growth economies. Do
Indian firms need to diversify their M&A portfolio by
exploring deal opportunities in other countries?
2. Enhance the deal value proposition: What unique value
proposition can Indian firms offer to enhance the value post-
deal? What can Indian firms add to create stand-alone
improvements for example, similar to say a Japanese or a
German firm wherein value is expected to be added in either
efficient processes and/or management practices? How will
the famed Indian cost advantage really play out? Is the “buy
markets overseas-offshore costs to India” sustainable in the
long term?
3. Develop capabilities to manage larger deals: What is
required to make the well-articulated M&A strategy and deal
proposition a reality? How robust are the execution
capabilities to manage a cross-border integration process?
How should cultural differences and operating in different
regulatory environments be managed ? How to manage the
integration and realize value with firms that maybe larger
than themselves and more mature either in capabilities,
people or brand?
4. Create an enabling governance structure: What board
level capabilities and organization design are required for
managing increased M&A activity? How should the board be
constituted to provide the right guidance for managing a
global organization with higher international presence? How
should boards make sure that the eventual value created
exceeds that expected?
5. Create a more enabling environment for domestic M&A:
What needs to be done to reduce the restrictions on M&A
and enable consolidation in sectors with low asset
productivity and sub-scale businesses? Will it create a more
efficient distribution of national resources and increase
productivity of assets?
For India to become a player to reckon with on the
international M&A scene, the above imperatives need to be
addressed urgently. The key is in the execution and speed.
Contributors

This study would not have been possible without the invaluable contribution of the following people.
We thank them for sharing their perspectives and experiences with us.

Aditya Sapru Hinduja Group of Companies    

Akhil Gupta   Blackstone Advisors India Private Ltd    
Aluri Srinivasa       ICICI Venture Funds Management Company Ltd
Anil Goel The Indian Hotels Company
Brian Brown   Citigroup Global Markets India Pvt Ltd  
Debashis Poddar  Tata Consultancy Services
Deepak Natraj Infosys Technologies Ltd
Dhanpal Jhaveri Vedanta Resources Plc 
G Sunderraman     Godrej & Boyce Manufacturing Company
Giovanni de Filippis  Fiat India Pvt Ltd     
Girish Bhat    Cadbury India Ltd  
Gopal Devanahalli     Infosys Technologies 
Harsh Goenka  RPG Enterprises
Homi Khusrokhan Tata Chemicals
Kishore Musale  Classic Stripes Pvt Ltd
M M Miyajiwala Voltas Ltd 
Manish Choksi Asian Paints
Manish Gupta Pinewood Laboratory
Mukul Nag ICICI Securities
N K Misra   Tata Steel Ltd
Nainesh Jaisingh        Standard Chartered Private Equity   
Prakash Apte    Syngenta India 
Prasanna Pahade  Voltas Ltd 
R Chandrasekar Suzlon Ltd
R S Thakur Tata Motors
Rahul Nair    Future Capital Holdings
Rajeev Gupta Carlyle India Advisors Pvt Ltd 
Rajiv Gandhi Wockhardt Ltd   
Rajrishi Singhal The Economic Times     
S Durgashankar      Mahindra & Mahindra Ltd  
Sai Chintala        AppLabs Technologies  
Sameer Sain Future Group
Saumen Chakraborty     Dr. Reddy's Laboratories Ltd
Shailendra Bhandari Centurion Bank of Punjab
Sharan Pasricha    Gossini Fashion Limited
Sumant Sinha       Aditya Birla Retail 
Sunit Mehra   Hunt Partners
V F Banaji Godrej Beverages & Foods Ltd
Venkatesh Srinivasan      Pfizer India