The rabbit and the elephant
Back during the helium-huffing of the first Internet bubble, a second-rate dialup company bought out the publisher of Time magazine with inflated, gilt-edged shares. When the clock struck midnight, the old media diva was left with a lover turned pumpkin and the sickening certainty that she had sold herself cheaply.
… AOL was then at the peak of the Internet boom, its total stock valued at $200 billion, more than double Time Warner’s. But not long after the new company signs went up, the stock went down… Its stock has fallen more than 70 percent since the merger two and a half years ago… [Link]
As I watch Indian companies acquire competitors across the globe, powered by a four-fold rise in the Sensex, I can’t help but worry that this, too, is a bubble, and the she-elephant corporations of Europe and America may find themselves with rabbit men rather than the horses they hitched.
India’s multinational rollups are coming fast and furious. Companies know full well their valuations are inflated and are very rationally trying to spend it before any decline. They’re also trying to expand overseas rather than battling red tape in Delhi. It’s not rational market share buys that concern me, it’s smaller companies who were at a quarter their current valuations just a couple of years ago, trying to swallow larger prey as a matter of prestige.
[Tata’s buyout of Corus] “was seen as a watershed deal and a matter of national pride… The financials [require] high performance levels, perfect post-deal execution and sustained high steel prices…’ the EBITDA… multiple of 9 for the Corus acquisition is… “higher than the industry average…” Mittal’s $34 billion acquisition of Arcelor last June was at [a] multiple of 4.3, while the industry median… is at about five. [Link]
Indian pharmaceutical company Ranbaxy Laboratories… announced… its [acquisition of] a generics company, Ethimed NV of Belgium. This is the fourth acquisition announced by the company in a week. [Link]
Shaan is an Indian national obsession. Large acquisitions tend to be seen priapically. But as the Sensex showed last week, stocks can deflate as quickly as they rise. If it’s all about the organ, grow organically.
on Tuesday, January 29th, 2008, 7:23 pm in Business, Economics › 
Email this
› 
Facebook this
› 
Reddit this
› Link
› Reader links
I knew you would put that kama sutra on your bookshelf to good use some day..just didn’t think it would be this. :)
it works the other way as well. some of it seems to be growing pains. the rupee is so devalued against the major western currencies that assets with longterm yield potential can be acquired for very cheap*. i would imagine the sensex boom is being driven by these non-resident (indian and non-indian) funds.
But your point is well taken. For instance it is a bit of a reach for Tata to get LandRover + Jag. May be they got a good deal, they got access to some 4WD technology or some new engine… but it is a reach. in a (oil) consumption conscious world, for a people’s car manufacturer to acquire vanity gasguzzlers such as these is a bit odd. Who knows? There may be something to it. Somebody told me about the Intel ‘bicycling’ model - keep pedaling and moving because if they stand still and dont release a new chip every quarter, they will collapse. The indian model could very well be the same. Keep moving and acquiring, because those who actually stop and try to rationalize every purchase will get trampled into dust.
*If I remember correctly, the largest cola (campa?) in india with a crazy ass distribution network was acquired for a very low cash amount (in $’s). The guy who sold it apparently woke up to what he had done and used dirty tricks to snarl the distribution until coke ponied up more cash. I feel ge has got the stake in ndtv for very cheap [it was covered in your news tab i believe].
Great post. I never looked at it that way.
But I’m not sure if this is a bubble, aren’t bubbles mostly industry specific — e.g. real estate, Internet.
The big difference between AOL/TIME and Tatas/Ranbaxy etc. is that most of these Indian companies have a track record of sustained growth and profitability, a far cry from AOL. These companies have actually delivered profits over the years in an environment that was not very business friendly. And Indian MNCs realise that to continue growing they have to go abroad. And the easiest way to do this is to acquire companies in phoren land rather than start from scratch. Makes perfect sense to me!
Though you are right, some of these acquisitions do not make as much business sense and will not deliver the promised returns. Again, nothing earth shaking there, happens all the time all over the world. But I think it is wrong to tar the whole Indian acquistion wave as a bubble waiting to burst. Sure, some will fall flat, and some will succeed. But I think the desi companies are on the right track.
And finally, it is wrong to call Mittal Steel an Indian company (and the Indian media and desis are wrong when they thump their chest and claim MS as their own). It is HQ in Amsterdam and is listed on LSE and has, at this point, NO operations in India.
Oops, sorry and scratch the Mittal comment I made above. Speed read the writeup on Tata/Corus and Mittal/Areclor and interpreted it absolutely wrong. Mea Culpa:)
questions least likely to make the list for match.com*
*yes. even the khoof submitted to it once.
Wow! Our Vedic mathematicians, after many years of deep penance, decided on exactly this for question #376 (b) on our new Swayamvar site, Kamastree.com.
eHarmony is handing out rulers.