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Business Commentary/Dilip Thakore

Politicians must stay away from M&A deals

The negotiations, alignments, mergers, and acquisitions which characterise the political scene in contemporary India after the recent indecisive general elections, are mirrored in the nation's corporate sector which is adjusting to the new era of liberalisation, deregulation, and the emerging global economy.

Recently liberalised from the shackles of the licence-permit-quota regulations and jealous monopoly legislation which had chained Indian industry for almost five decades, suddenly it is open season as the mergers and acquisition game is being played in right earnest. During the past few weeks, newspaper headlines and the hitherto moribund stock market have come alive with the announcement of a plethora of mergers, takeover bids and corporate amalgamations.

In the vanguard of the newly adventurous and acquisitive corporates, which are restructuring and expanding their capacities and operations through mergers and acquisitions (M&A) route is India's largest consumer products manufacturing company, Hindustan Lever. After lifting the starting gates of the M&A game some two years ago by taking over and comprehensively absorbing the floundering Tata Oil Mills Co, Hindustan Lever has since taken over Lakme Ltd and merged with its affiliate Ponds India to emerge as international sized powerhouse FMCG (fast moving consumer goods) manufacturing company.

Hindustan Lever's appetite for mergers and acquisitions has stimulated other corporates. Nicholas Piramal has begun playing the M&A game with considerable skill and enthusiasm, taking over the Boeringher Knoll, an affiliate of the German pharmaceutical major Knoll gmbh, among other companies to emerge as a pharmaceutical industry heavyweight almost overnight. Likewise the Bombay-based Wockhardt Ltd has acquired a majority shareholding in the hitherto Tata-controlled Merind and Tata Pharma.

Now the advantages of M&A over setting up long-gestation greenfield projects seem to have also enthused corporate managements in more capital-intensive industries. Sterlite Industries' bold open offer for a 20 per cent stake in the Indo-Canadian aluminium major Indian Aluminium has triggered a war of offers and counter-offers from Alcan, the Canadian partner. Ditto the Madras-based India Cement Ltd's public offer for the shares of the Hyderabad-based Raasi Cements at more than three times their quoted market price.

This spate of M&A activity, which is changing the persona of Indian industry, is certain to attract the attention of India's generally business-illiterate but nevertheless meddlesome tribe of politicians and self-styled social engineers. Given the interventionist bent and socialist hangover of the political and intellectual classes, it is only a matter of time before a hue and cry is raised about big, bad multinationals and capitalists making hostile takeover bids for weak and defenceless medium and small-size Indian companies.

But before they start shooting from the lip, our newly-empowered leaders and fellow travelling intellectuals would do well to examine the case for non-intervention in the restructuring of Indian industry through the M&A and other natural processes of growth and evolution.

For one, the current M&A fever is the natural consequence of economic liberalisation and deregulation of the Indian economy. For several decades during the socialism ordained licence-permit-quota regime, licensed capacities grudgingly granted to private sector companies and entrepreneurs setting up manufacturing facilities were to small to be viable. If all these years they survived and artificially prospered, it was because they were sheltered behind huge tariff wall which shut out external competition while the licensing system effectively protected them against domestic competition.

Thus, in the 1970s, Indian industry offered the ridiculous example of a spate of polyester yarn manufacturing companies with installed capacities of 6,000 tonnes per annum springing up all over the countryside when the world over it was acknowledged that the minimum economic size of a polyester yarn manufacturing plant should be at least 50,000 tonnes per annum.

Likewise, numerous cement and mini steel manufacturing companies with suboptimal size plants were licensed. These examples of bureaucratic business illiteracy and myopia were replicated in virtually every sector of the Indian economic including agriculture. The only corporates which were given minimum economic size manufacturing licences were public sector enterprises which have proved to be spectacular failures even in heavily protected markets.

Now, with import tariffs having been sharply reduced during the post-1991 era of economic liberalisation and deregulation and likely to reduced further since India is a member signatory of the World Trade Organisation, companies with suboptimal size manufacturing have no option but to merge with larger companies to avoid being steamrolled. Likewise, for larger Indian companies which are pathetically small by international standards, acquisition of smaller companies offer the advantages of quick expansion and financial saving (because the capital costs of setting up greenfield projects are usually considerably higher).

Shareholders, especially of targeted companies, are also likely to benefit if M&A bids are not subject to overzealous government and regulatory interference. The ruling of the Securities and Exchange Board of India that acquisitive companies have to make a public offer to purchase at least 20 per cent of the equity of the target company is a great boon to shareholders who hitherto tended to be left out in the cold as promoter-to-promoter private deals were struck. And what's good for shareholders is good for the stock market and industry because a booming stock market makes it easier for companies to raise capital for growth and expansion.

While corporate India is in the process of painful restructuring to undo the deep damage which five decades of micro-management of industry by government has inflicted upon it, the temptation to the newly-empowered government at the Centre to intervene will be strong. But given the virtual all-party consensus on the desirability of economic liberalisation ones hopes this is a temptation that the new government will resist.

One hopeful sign is that there has been very little political comment about the rash of M&A activity which dominates the contemporary corporate scene. But after the general elections, several loose canons are lurching about the political stage. In particular, 'wrecker' George Fernandes high on his mishmash of ultra left- and right-wing politics is back in the limelight and already shooting his mouth off.

Dilip Thakore