Have India Inc's overseas buyouts worked?

Systech President Hemant Luthra was recently in Germany to check out the progress at Schoenweisse, a unit his company had acquired some time back.

He will soon be off to visit another acquired company there called Jeco. These are two of the ten automobile ancillaries that Systech, a subsidiary of Mahindra and Mahindra, has bought in the past three-and-a-half years, and Luthra is satisfied with the progress.

"We have managed to reduce costs and expect our operating margins to improve by 200 basis points this year," he said, adding that Systech has just bagged an order from Renault. The next step, said Luthra, is to shift some production back to India so that the costs can be brought down further.

"Through tangible or intangible benefits, we would have recovered our investments in the companies that we've bought in three years' time," said he. Systech spent around Eueo 265 million on the two acquisitions.

In another part of Germany, Dr Reddy's Labs is grappling with regulatory hurdles. With the German government reducing prices of generic drugs by about 20 per cent, the performance of Betapharm, a company that Dr Reddy's bought in February 2006 for $570 million, has suffered with revenues growing only 5 per cent in 2007-08. Thanks to stringent government norms, Dr Reddy's has transferred just about half of the production back home.

Indian companies have done stunning acquisitions in the recent past. (See table.) It was widely expected that with their frugal managerial practices, they would soon be able to recover the money spent in these acquisitions. While it has worked in several cases, in some cases it hasn't.

The investment Hindalco made in the Canadian firm Novelis, which it acquired for $6.2 billion in February 2007, was worth around 75 per cent of its market capitalisation at that time.

The acquisition has resulted in deterioration in Hindalco's return on equity from 20.8 per cent to 10.6 per cent. Fixed price contracts will keep Novelis' cash flows under pressure and, therefore, it will probably be a while before Hindalco could use them to repay borrowings.

In Ontario, on the other hand, Essar Steel NV has just repaid a loan of Canada $750 million taken by its Algoma unit. Essar Steel had taken over Algoma in June 2007 for Canada $1.8 billion and has since increased production at the unit from 2.2 million tonnes per annum to 3.2 million tonnes.

"We invested about $250 million after the acquisition and upgraded the plant. With the improved cash flows, we have gradually reduced the debt on Algoma's balance sheet," said Essar Steel NV CEO Jatinder Mehra, adding that very soon both the purchase of raw materials as also the marketing of the final products will be centralised at the headquarters of Essar Steel NV in The Netherlands.

At Tata Communications, which bought out Teleglobe and Tyco Global Network, the integration has happened but the financial benefits may take time to come. Nevertheless, both Teleglobe and Tyco are in a better financial shape than they were in 2005 when they were taken over.

Tata Communications Senior Vice-president (corporate strategy) Srinivasa Adepall said a whole new range of services for customers was created by building on each company's strength: "Integration cannot be about egos; we acknowledged that Teleglobe had more experience in several areas and allowed people there to run the show."

A similar approach seems to have helped Aegis. Managing Director Aparup Sengupta said: "Revenues have more than doubled from $62 million to $140 million and we're making profit now."

Sengupta said the Indian team acknowledged the learning of the US team and also introduced some new approaches which were accepted. It has now expanded the team there to 4,500 people from 1,700 initially. Attrition has come down to around 65 per cent from 160 per cent about one-and-a-half years back.

With nine acquisitions in the span of about two years, Wipro too has had mixed results. It has seen success in AMS Energy and Enabler but has faced a few problems with New Logic and Saraware. The profitability of Infocrossing, which it acquired for $600 million, has improved.