India has always been a land of opportunities, for its people and foreigners alike. Our country’s geographic location is one of prominence too, close to the markets of South East Asia, Middle East and also Europe making it a constant desirable center of commerce and trade.

According to projections made by internationally renowned consultants and the International Monetary Fund (IMF), India is likely to become one of the largest economies in the world by the year 2025. In the light of this expected evolution, most businesses around the world would like to make the most of the growth opportunities offered by Indian markets and hence we see some of them are already stepping up their investments. As for the ones who aren’t already in India, business expansion plans suggest that they are definitely eyeing India for investments in the coming years.

Every sector of India’s consumer market is booming, making the country far less vulnerable to external shocks and pressures than other emerging markets, and hence the perfect destination for investments.

Besides the attraction towards lower cost of production due to lower labour rates in the country and its projected growth, foreign investment has been made easier by the Indian Government’s constantly evolving investor friendly policies. Foreigners can directly invest in India either on their own or as a joint venture, with a few exceptions with regard to investment limits and sectors. With significant investment to be made in upgrading India’s poor infrastructure in the next 10 years (estimated to be $1.7 trillion), Government of India is taking various steps to further encourage private and foreign investments.

Strong strategic rationale

With the increase in private and foreign investments in India, a widespread trend of foreign investors acquiring or merging with local business has emerged. From a strong strategic point of view, this route helps MNCs that are already present in India but have not been able to establish themselves as leading players, crack the market. A local acquisition that comes with an existing customer base and local insights into the market would help them address all the lacunae. For companies that are yet to enter the Indian markets, one would strongly recommend them not to neglect the opportunity to gain profits from the large and diversified demographic, EM play, and highest GDP growth rates offered by India.

Another government led campaign – of Make in India – is a strong reason to increase investments. Those projects under the Make In India banner receive a number of subsidies and exemptions to help them grow in the initial stages and become self-sustaining entities. Investing in such a project will ideally help investors address the needs the local market and also use India as a manufacturing hub to supply to the world. This is especially important in the light of the diminishing labour arbitrage in China and concerns over IP protection in China.

Moderate strategic rationale

From a slightly moderate rationale and immediate results perspective, traditional old school MNCs use an acquisition in India to shake up their style of functioning and decision-making or help meet their growth outlook for the EM play. Most foreign players have now identified India as a fertile testing ground for the world and engage in small to mid-size acquisitions in order to introduce and test products or services for the developing and emerging markets.

There are a plethora of different (and sometimes contrasting or illogical) reasons why foreign buyers do acquisitions in India. The most basic reason is that the Indian market is unique with its own nuances and challenges, which are quite different from the developed markets. Hence, some American and European buyers develop localised M&A strategies (which can be drastically different from their global strategy) to target growth in the Indian market. For example, PerkinElmer Inc, a global leader in diagnostics related to reproductive health, neonatal screening, and genomics, acquired Tulip Diagnostics Pvt Ltd in India in early 2017 to expand its infectious disease screening capabilities and strengthen its position for long-term growth in emerging market diagnostics.

On the contrary, in some cases, foreign buyers have done acquisitions in India to make the Indian business in line with their global strategy. A good example of this would be Fresenius Medical Care’s acquisition of Sparsh Nephrocare in India in 2016. Fresenius Medical Care is a global leader in dialysis services. It acquired Sparsh Nephrocare to establish itself as a leading dialysis services provider in the underpenetrated Indian market.

Also, many global multinationals (especially Japanese majors) enter the Indian market through acquisitions and partnerships both as a global business growth driver as well as a risk management strategy to diversify themselves from their current presence in China.

The obtuse rationale

Additionally, due to the complex nature of the Indian market, top management teams of many homegrown Indian businesses have shaped up to become highly skilled, knowledgeable professionals with a global outlook, and are thus on par with their peers from the MNCs. Some buyers acquire businesses with promising talent to get access to this highly qualified and competent top management team, which can then be capitalised to work at much larger global scale. In some cases, Japanese majors have acquired Indian businesses because in the long term such Indian management teams can be a major asset to the Japanese headquarters in ‘shaking up’ their own inward-looking top management teams and make them more global in their approach.

While the above reasons for acquisitions may appeal to a strategic business mind, in a few rare cases Chief executives of MNCs indulge in quite obtuse rationale and acquire smaller companies to massage their ego or to further their career. M&As help demonstrates and implement their style of management on Indian companies and thus making a point with the top management.

(Opinion piece by Abhijeet Biswas, MD & Co-Founder, 7i Capital Advisors LLP)

Source: Business Standard