M&A deals in 2000 -- Few details on future plans

Suresh Krishnamurthy

THE year gone by is notable for the greater degree of reorganisation in the ownership control of companies, broadly clubbed together under the head of mergers and acquisitions.

There were more open offers, mergers and overseas acquisitions by Indian companies last year than in earlier years.

But the more things changed, the more they remained static. A large number of players in the non-technology sectors, such as auto-ancillaries, chemicals, consumer goods, engineering, electronics, textiles and metals are still quite as fragmented as before, even as M&A deals in cement, banking and finance, healthcare and technology gathered momentum.

Moreover, significantly different levels of M&A activity were visible, even in parts of the same industry. Thus, we saw public sector banks remaining mute spectators while private sector banks joined forces to emerge stronger; and consumer and healthcare MNCs consolidating while most Indian companies remained single.

The status quo is still the norm and, crucially, at the fag end of the year, industry captains rallied around to ensure that things remained unchanged and unchallenged. Hostile takeover raids came to nought, and there is strenuous lobbying to ensure that SEBI comes up with modified guidelines that will make hostile raids more difficult. In short, a dynamic and a more mature market for corporate control is still proving elusive.

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The following is a summary of the high points of M&A activity in 2000:

*Overseas acquisitions by Indian companies -- more specifically, the buyout of Tetley of UK by Tata Tea and the merger between Propack AG and Essel Packaging.

*Consolidation in the cement industry and the subsequent emergence of developments suggesting reduced competition

*Acquisition of large stake in BSES by Reliance Industries;

*Hostile raids on Gesco Corporation and Bombay Dyeing;

*Impact at the local level of global-level consolidation;

*All-round corporate apathy towards essential disclosures in M&A deals.

Industry-wise activity

By and large, greater M&A activity remained restricted to the cement and technology sectors. Some amount of consolidation was also evident in parts of the finance -- specifically, housing finance and private sector banks -- and healthcare sectors.

The cement industry consolidation gathered pace with Lafarge's buyout of Raymond's cement plant and the response of the Gujarat Ambuja group to emerge bigger and stronger to counter the Lafarge threat. Gujarat Ambuja bought out DLF Cement, and its subsidiary, Ambuja Cement India, now holds large stakes in Ambuja Cement Eastern and ACC.

With control over large cement capacities held by Grasim, L&T, India Cement and Madras Cement, the consolidation appears complete for the time being. In the wake of the consolidation emerged efforts to tailor supply to demand; this has now focussed attention on the possible anti-competitive effects of too much M&A activity.

In the healthcare sector, Nicholas Piramal's acquisition of Rhone Poulenc India and the purchase of American Remedies by Dr. Reddy's were the combinations that involved unrelated parties. The Astra-IDL deal involved merely the exit of the Indian partner, and most others remained restricted to the purchase of brands or bulk drug assets, or mergers of group companies.

Other notable combinations to emerge during 2000 are that of Hindalco-Indal and the changes in the power sector. Hindalco acquired a majority stake in Indal by buying out the stake of Alcan and then coming out with the mandatory open offer. The deal has considerably strengthened Hindalco's position in the aluminium sector.

In the power sector, Reliance acquired a 25 per cent stake in BSES through an open offer. Interestingly, the unsolicited offer from Reliance was not deemed hostile by the board of directors of BSES and the shareholders did not receive any meaningful advice on whether the offer price represented adequate value for the company. Perhaps in response the Tata group decided to merge their power companies - Tata Hydro and Andhra Valley - into Tata Power.

Reverberations of global-level consolidations were also felt in the Indian markets. The BP Amoco buy out of Burmah Castrol of the UK led to one of the largest open offers ever made in India, for Castrol India. Similar offers due to global-level consolidation were made for Coates of India and International Bestfoods. However, global-level mergers such as those involving Pfizer-Warner Lambert and BASF-Cyanamid are yet to have their impact on the Indian affiliates.

Overseas acquisitions

Bolstered by the runaway increase in stock prices in the early part of the year, mid- and small-sized companies in the technology industry were on a merger and acquisition spree during the year. Big-ticket last year include that of BFL and Mphasis, Global Tele-Systems and Global Electronic Commerce Services, Sun Infoways and Zap Infotech, and the spate of mergers involving Hinduja Finance that effectively turned the company into a convergence entity.

In acquisitions, SSI's buyout of Albion Orion, the acquisition of SeraNova Inc and Sky Capital International by Silverline Industries, and the acquisition of companies such as Film Roman by Pentamedia Graphics stand out for the size of the deal. This apart, mid-sized companies such as DSQ Software and Aptech, and a number of small companies came up with acquisitions of smaller companies located abroad.

In the non-technology sector, the much anticipated buyout of Tetley, a UK-based tea company, fructified this year. Tata Tea made the acquisition through a newly created company incorporated overseas. In the packaging sector, Essel Packaging bought out the assets of Propack AG in a few Asian and Latin American countries.

Disclosure apathy

Even as the M&A activity increased, the standards of disclosure remained quite poor. In the acquisition of overseas companies, almost all companies failed to spell out the revenue and earnings profile of the targets acquired. More important, the future course of action also remained unclear.

For example, in the mergers of IT companies, the period within which the business of the target entity would be shifted to the offshore development centres in India was not specified in almost all the cases. Emphasis was almost always on the higher revenue per employee earned by the overseas companies but the opinion of the management regarding the poor net profit margins of these companies was not forthcoming.

In the non-technology companies, too, such as the Hindalco-Indal combination, the merger of the Tata Electric Companies, and the acquisition of stake in BSES by Reliance, shareholders continue to remain in the dark regarding the future plans. The Indian affiliates of the MNCs are also tight-lipped about the details.

The mergers of the unlisted companies of Indian Shaving Products and Monsanto Chemicals, and the merger of Atlas Copco and Chicago Pneumatic have also taken place with surprisingly little transparency regarding the rationale for the combination or the valuations of the deal.

More of the same

The sharp fall in stock prices in the latter half of 2000 appears to have cooled down M&A activity. However, as stock prices bottom out, a revival of the M&A activity, especially in the technology industry, appears likely. We might see one or two local software service companies joining hands to reduce the risks faced by mid-sized and small companies.

In the non-technology sectors, without leveraged buyouts a higher degree of activity is unlikely. Moreover, with most companies having borrowed substantially from financial institutions, the involvement of these lenders is crucial for the emergence of any significant degree of reorganisation. Otherwise, it may only continue to be mergers within the group or an occasional buyout of a weaker company by a stronger one. In short, we may only see more of what happened in 2000.