Earlier this month, Apollo Tyres, one of India’s leading tyre companies, announced its decision to buy the U.S.-based Cooper Tire and Rubber Co. for a consideration, to be settled fully in cash, of $2.5 billion (roughly Rs.14,500 crore).
The deal pitches Apollo Tyres into the top league of global tyre companies. Just over a week ago, Mahindra & Mahindra entered into a share swap arrangement with CIE Automotive of Spain to create a global component manufacturer.
Obviously, these investments make commercial sense for the investing companies. However, rather than discuss those aspects, it would be good to look beyond individual deals. What do these takeovers signify in the larger context of globalisation?
Especially when the acquirer is from an emerging market country, and the acquired is well established in a rich country?
Globalisation, among its other attributes, has come to imply a two-way flow of capital. A country, whether it is India, the U.S. or the U.K., receives as well as exports capital.
The United Nations Conference on Trade and Development, which tracks these capital flows to-and-fro in its annual World Investment Report, classifies them into two categories — capital flows that go into new ‘greenfield’ ventures, that is, they go into setting up new capital assets (plant and machinery and so on) and capital flows that fund mergers and acquisitions (M&As), which invariably involve taking over an existing company in the host country. The latter has become increasingly popular in recent years.
The broad heading given to all long period capital flows is foreign direct investment (FDI). In the globalisation context, the Apollo deal is, therefore, an outward FDI. Such deals have not been uncommon.
A representative list from the recent past would include Tata Steel’s acquisition of European steel-maker Corus ($12.780 billion) in 2006, Hindalco’s of Novelis ($5.706 billion) in 2007, Bharti Airtel’s investment in Airtel Africa (10.70 billion) in 2010, and ONGC’s purchase of Kazakhstan assets ($5 billion) in 2012.
What is striking is that most big-ticket investments have taken the M&A route, and not gone in for new projects.
Also, the quantum of outward FDI from India has been growing. Indeed, according to the Associated Chambers of Commerce and Industry of India, the country’s overseas investment — comprising loans, equity flows and guarantees — reached almost $27 billion in 2012-13, and is likely to be higher than the FDI inflows in the form of equity investments.
A logical question would be: why do India’s large companies seek investment avenues abroad, especially when there are opportunities in India?
There could be a variety of answers. There are too many hassles in setting up new units within the country. Abroad, the policy framework and environment may be more conducive. The motivation may also be in meeting competition at the global level.
After all, steel, tyres, aluminium, automobile components — industries where Indian companies have ventured abroad — are truly global industries. There could also be the benefit of technological upgradation through M&As.
Even more basically, Indian companies are investing abroad because they have been permitted to — foreign exchange regulations of, say, two decades ago were not at all encouraging any outward flow.
The main reason then was that on the back of a fast growing economy, Indian companies had found the confidence to deal abroad.
Of course, it has not been all hunky-dory for Indian companies that have ventured abroad. The experiences of the Tata group in two recent acquisitions are illuminating, and have become the case studies on opportunities and pitfalls of striking mega deals abroad. Barely six years after buying Corus, Tata Steel has written down the value of its assets by $1.6 billion.
Ironically, the Corus deal was hailed as a master stroke while the group’s acquisition of Jaguar and Land Rover from Ford met with plenty of scepticism. Five years on, however, the tables have been turned.
The JLR acquisition has been a success. In over two decades of a liberalised regime, the track record of outward FDI has been uneven. But, given the inexorable march of globalisation, FDI (both inward and outward) will continue.