Global Themes

On Globalization & Venture Capital

Comparing Indian and Chinese M&A

Some excerpts from a great article comparing Indian and Chinese M&A, “Dancing “Dragon” and Running “Elephant” on the Stage of M&A  by Mark He at Zero2IPO Research.

*** Excerpts Begin (emphasis mine) *** 

the amount of cross-border mergers and acquisitions initiated by the Chinese enterprises reached more than US$20B in 2007. According to the Federation of Indian Chamber of Commerce and Industry, the Indian enterprises have acquired more than 300 foreign enterprises during the past eight years and the amount of cross-border mergers and acquisitions initiated by the Indian enterprises reached more than US$40B in 2006 and 2007 only. Behind the enormous figures, we can see some similarities and differences between the two countries in the cross-border M&A market.

However, the dominance of manufacturing in the current industrial structure of China and the relatively weakness of service industry plus a crude economic development mode have led to an increasing demand for resource materials like minerals. As a consequence, M&As initiated by Chinese enterprises have been focused on such fields as manufacture and mineral resources, as is true of large M&As. Recently, taking chance of the sub-prime loan crisis, Chinese financial enterprises initiate frequent international M&As. However, there were hardly any highlights in such M&As in fields like biopharmaceuticals (it’s not until the beginning of this year when WuXi PharmaTech acquired AppTec Laboratory Services, Inc. that the zero record was broken in the international acquisitions of the biopharmaceutical field).

In contrast, M&As initiated by Indian enterprises are more diversified. They not only have initiated frequent acquisitions in both information service and biopharmaceutical fields relying on their advantages in the tertiary industry; but also have acquired European and American companies in such fields as iron and steel, automobile, and consumer goods. For example, in recent years several famous IT service companies of India, including Infosys, Wipro and Satyam, have acquired small/medium-size IT service companies in Europe and Latin America constantly; and UB acquired Whyte & Mackay, a whisky manufacturer in Scotland for US$1.20B. The frequent acquisitions of Indian enterprises in many industries are possible with the cluster effect in such fields as IT and biopharmaceuticals. In contrast, Chinese enterprises often fight alone in many fields of cross-border M&As rather than fight together, thus failing to give play to the cluster effect.

As far as the scale of M&A is concerned, the Indian enterprises move far ahead of its Chinese counterparts. So far, the amount of the largest cross-border M&A initiated by the Chinese enterprises is US$5.46B. In contrast, take Tata Group, a leading large Indian enterprises, for example, it has spent US$18.7B on M&A since 2006, including US$18.5B on cross-border M&A; for instance, Tata Group acquired Corus, a Britain-Dutch steel maker, for US$12.1B. Moreover, India??s Mittal Group acquired Ancelor, the largest iron and steel plant in Europe, for approximately US$35B in 2006. Such large scale M&As enabled successful integration.

To a certain extent, the Indian entrepreneurs are more skillful in large cross-border M&As and more familiar with the international rules. They not only make careful arrangement for the framework of M&A, but also carry out proper publicity activities in the target enterprises and respective countries, which lay a solid foundation for successful large cross-border M&As. This is possible not only due to the close cultural contact between the Indian and the Europe and USA, but also the presence of a group of Indian entrepreneurs with global vision.

Due to different national conditions and industry policies of China and India, most of the Chinese enterprises engaged in large cross-border M&As are large SOEs. Although the POEs in China have been increasingly active in the stage of cross-border M&A in recent years, the number of large cross-border M&As initiated by them is small and they can not play a leading role in such M&As in terms of scale and influence. In the meanwhile, we can see that the background of the Chinese SOEs is a barrier to the successful large cross-border M&As initiated by the Chinese enterprises to a certain extent. In contrast, Indian enterprises active in the international acquisition market are mostly POEs, which makes it easy for them to enter the western market economy countries naturally. In addition, a high level of internationalization plus experience of cross-border M&A accumulated over the years have combined to make many Indian POEs such as Tata Group and Ancelor-Mittal Group leaders on the stage of cross-border M&A. What is worth mentioning is that powerful support of the Indian government for POEs and relatively loose industry policies have created critical environment for the rapid development of private owned economy.

From the perspective of sustainable and sound development of the economy of a country, possession of a large number of POEs with global competitiveness is an important indicator of the firmness of the economic mechanism of a country. We not only need a large group of SOEs that move in the forefront of cross-border M&A, but also need to use greater efforts to support and cultivate a large group of POEs of strong competition capabilities. It can be said that the “wolves effect” created by POEs will play an important role in future industry development and cross-border investment.

A study of the M&A arrangement of Mittal and Tata, etc. shows that these Indian enterprises have a clear understanding of their position in the entire industry chain and have developed a complete set of M&A strategies based on such understanding. M&A has become part of the long-term development plan of the enterprise(s) and there are special departments within the enterprise(s) in charge of M&A-related business that are looking for target enterprises.

Through a comprehensive review of the M&A path of large Indian enterprises such as Tata Group and Mittal Group, we can see that each acquisition is a link of their global arrangement and they have grown into world-class enterprises through M&As one by one over the years, therefore gaining control of the commanding elevation of the entire industry. What goes through the entire M&A process is the initiative to respond to and participate in international competition actively. Moreover, when developing the M&A strategies, the Indian enterprises not only take into consideration the present competition status of the industries, but also make active efforts to gain control of the upstream and downstream of the global industry chain from a long-term perspective. For instance, Mittal Group not only acquired many iron and steel plants around the world, but also acquired plenty of resources such as iron ores so that half of its iron ore resources can be self-supplied. Seizing of these opportunities naturally enhances the say of the enterprises and their ability to resist external risks. In contrast, large Chinese enterprises, especially those restricted by raw materials, are inferior to their Indian counterparts in seizing the opportunities actively by means of M&A. With increasingly intensified global competition, it is impossible for an enterprise to separate itself from others and failure to participate in global competition actively will only reduce the living space of the enterprise itself.

Any enterprise engaged in cross-border M&A is inevitably faced with economic, cultural, legal challenges of the country in which the target enterprise is located. To meet these challenges, a group of talents familiar with the language, culture and laws of the country of the target enterprise(s) are required so as to effectively control and manage the enterprise(s) acquired. Presently, the Chinese enterprises lack their own talent team during and after the M&As and the ability to manage the acquired enterprise(s), which leads to friction and even conflicts with the target enterprise(s) in overseas M&As and investment. The Indian enterprises entered the global M&A stage many years ago and have accumulated abundant experience in the cultivation of globalized talents and how to control the senior management of the acquired enterprise and make best use of them, which gap is difficult to fill in within a short period of time.

Read the article in full here

Copyright © 2007 Zero2IPO Group All Rights Reserved

August 7th, 2008 Posted by | China, Emerging Markets, Global Competition, Globalization, India | one comment

1 Comment »

  1. Hi

    It’s an in-depth analysis, nevertheless. In my view, the question should be whether we are committing our resources to our good or frittering them away just for the sake of inane “prestige”? Has there been a study if the EPS of the shareholders has really increased with such acquisitions? If that is so then M&E shows will have the happy endings.



    Comment by A. N. Nanda | September 5, 2008

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