India's Overreach Comes Unstuck in South Wales

This article first appeared on the Riding the Elephant site.

Tata Steel's decision on March 29 to seek buyers for its Corus steel business in the U.K. is the latest example of Indian companies finding they rushed too quickly and expensively into large foreign acquisitions that were all the rage a decade ago.

Some have been successful, notably Tata's Jaguar Land Rover car business, but for many the burdens of rising debt, falling markets and lack of international savvy and expertise have led them to sell what they had bought during the "India Shining" years of the 2000s.

The Corus decision is a blow for the prestige of both Tata, one of India's largest and most respectable conglomerates, and its former chairman, Ratan Tata, who drove the $13.6 billion acquisition in 2007 despite opposition from some colleagues. This was part of a plan to spread the group's many businesses across the globe—$20 billion was spent on foreign takeovers during Ratan Tata's time in charge.

Shedding Corus is the biggest and toughest decision taken by Cyrus Mistry, who took over as head of the group from Ratan Tata in 2012, presiding over (2012 figures) $100 billion–plus revenues, more than half from 80 countries overseas.

It is also a blow for India—both the U.K. and Indian governments have been proud to boast that Tata is the biggest employer in the U.K.'s manufacturing industry, which it will no longer be once it loses Tata Steel's 15,000 employees. Efforts have now started to find buyers at the same time as trade union opposition is being organized, with calls for the British government to help in what is becoming a major political issue over the future of the U.K.'s steel industry.

The deal looked logical because of synergy between Tata's iron ore mining and steel producing business in India with Corus's blast furnaces, rolling mills and other allied operations in the U.K. But the purchase price was high, the steel slumped internationally and Corus could not compete. With its mentor, Ratan Tata, gone and Mistry needing to shed debt, the news of the Corus sale was perhaps inevitable.

In May 2007, I wrote in Fortune magazine about "the first flush of nationalistic fervor" that had greeted the Corus takeover and commented that there had been "so much foreign acquisition talk by Indian companies it seemed as if herd instinct had replaced financial caution." And indeed it had. Indian companies had reported 34 foreign acquisitions totaling $10.4 billion as completed or pending so far that year, according to Dealogic, a British research firm. The total for the year 2006 was $23 billion.

(That is small compared with China's current international acquisitions. The Wall Street Journal has reported that Chinese companies did deals worth roughly $68 billion in the first few weeks of this year, which is about half the total for all of last year, according to Dealogic.)

Bankers were encouraging companies to make acquisitions, often without taking into account Indian companies' lack of experience in very different environments abroad. "Both Tata and Birla are cushioned by substantial internal cash reserves that will enable them to cover debt taken on with the acquisitions," one leading Mumbai banker told me for my Fortune article—wrongly in the case of Tata.

"Many companies had surplus cash, access to easy money and hubris—an over-inflated view of what they could achieve," a Mumbai banker said to me today.

To begin with, the overseas acquisitions were seen as an example of Indian companies growing up enough to venture outside their home markets. But by about 2009-2010, the story changed because bankers and businessmen wanted to castigate the Congress-led government and its environment minister, Jairam Ramesh, for making India such an unattractive place to invest that they were fleeing abroad. That may have been true in some cases, but it was mostly political spin.

Unsustainable

Coal mines, steel plants and power and other infrastructure projects top the lists of industries where Indian companies rushed headlong into unsustainable commitments.

Leading the pack of companies with problems caused by expanding too fast and too far is Arcelor Mittal, the world's largest steel company that is controlled by Kolkata-born London-based Lakshmi Mittal, which made an $8 billion loss last year.

Companies shedding assets include Suzlon Energy, the world's fifth-largest wind turbine maker and a stock market favorite some years ago, and a clutch of new infrastructure companies such as GMR, GVK and Lanco with interests in airports and other power, infrastructure and mining businesses. Fortis Healthcare, run by part of the family that developed the Ranbaxy pharmaceuticals company, had a hospitals and allied businesses' buying splurge in Singapore, Hong Kong, Australia and Vietnam and then shed assets.

Bharti AirTel, India's biggest mobile telecom operator, over-reached when it assumed it could easily cope with mobile businesses across Africa. It has sold operations in places such as Burkina Faso and Sierra Leone as well as shedding a telecom towers business to raise cash. Mukesh Ambani's Reliance Industries got out of a U.S. shale gas investment (though it profited from it financially, investing $254 m and selling for $1 billion five years later).

The Aditya Birla group did well with smallish acquisitions in carbon black and viscose fiber but then, seemingly left behind by other companies that were rushing abroad, acquired Novelis, a U.S. industrial aluminum company, for $6 billion. That seemed a neat fit with Birla's Hindalco bauxite and aluminum producing business, but Birla paid too much and has been saddled with a financial burden.

There have of course been successes. Tata Motors provided Jaguar Land Rover with the financial strength and management commitment and focus that it had lacked under Ford, the previous owner. It was thus able to build on design work for new models that Ford had started.

Bharat Forge (Kalyani group) and the Mahindra group have also done well with relatively small scale acquisitions in manufacturing businesses linked with the auto industry. There have also been successes in the information technology area with the industry leaders such as Tata's TCS, Wipro and Infosys plus smaller players, in health care by the Godrej group for example, and in the pharmaceutical industry.

So all is not lost, and lessons have maybe been learned—take it slowly in small bites and avoid being swept along by a desire for size rather than precise business logic.

John Elliott's new book is IMPLOSION: India's Tryst With Reality (HarperCollins, India).