Dubai Ports and Indian Companies Expanding in the West

Summary:
Indian companies will be able to make significant acquisitions in the US and Western Europe despite the collapse of the Dubai ports deal. Two factors will influence cross border Indian M&A: 1) Industry of Acquisition Target; 2) Mittals’ Handling of the Arcelor situation

Introduction:
Since the collapse of the Dubai Ports deal (http://en.wikipedia.org/wiki/Dubai_Ports_World_controversy), many people have asked me whether I believe Indian companies will be able to make large (+$1 billion) in the United States and Western Europe and when we will see the first Indian acquisition of a US company for more than $1 billion. While I believe protectionism will increase in the West over the coming years, I don’t believe it will be able to stop the expansion of Middle Eastern and Indian companies in the West. In my estimation, we have already seen a billion USD transaction by an Indian company – Mittal Steel’s acquisition of the US based International Steel Group for $4.5 billion. By the end of 2008, I believe we will see an additional two such acquisitions. Cross-border M&A, over the next several years, will be shaped by the industry of acquisition targets and how the Mittals handle their unsolicited bid for Arcelor.

Industry of Acquisition Target:
The US and Western Europe do not want Indian firms to control companies in the security, infrastructure, and natural resource sectors. Many business leaders in South Asia and the West are concerned over growing protectionism sentiment and politicians using that sentiment for partisan gains. Duabi Ports revealed that US politicians will thwart acquisitions by Middle Eastern (ME) and Indian companies in certain industries. However, Chinese companies have faced both sides of this issue before. CNOOC, a Chinese oil company, went through a similar situation to the Dubai Ports Deal when it attempted to acquire Chevron. At the same time, Lenovo was able to acquire the computer division from IBM. These Chinese acquisitions demonstrate that US politicians and the public will tolerate acquisitions where foreign entities won’t control US security, infrastructure, and natural resource assets. Indian I&T and pharma companies will be able to undertake large US acquisitions the next few years.

Mittals’ Handling of the Arcelor situation:
Another catalyst to cross-border M&A will be how the Mittals handle their unsolicited bid for Arcelor. Right now, Lakshmi and Aditya Mittal have the opportunity to do more to open the gates for Indian M&A in US and Europe than any other factor. They have the opportunity to change opinions, in Western markets, about the ability of Indian companies to execute mergers and acquisitions.

In the 1990’s and the early part of this decade, Indian companies developed a bad reputation in Western M&A circles. Since cross-border M&A was new for many Indian companies during this time, Indian business leaders focused on learning. They went around meeting many bankers and acquisition targets without many deals ever coming to fruition. The perception is that Indian companies have not developed the internal resources or knowledge to execute mergers and acquisitions. As a result, US bankers and companies believe that Indian companies are slow to get deals done and that they will waste a great deal of time looking at many companies and asking for non-critical information. I have seen a marked shift by Indian companies; they have created dedicated M&A teams and brought in individuals with more experience executing deals. When US bankers or companies hear about interest by Indian companies, there is part of them that sarcastically thinks, “Here we go again.” They were left with a bad taste in their mouth from their dealings with Indian companies in the late 1990’s, when they wasted a great deal of time with Indian companies without anything coming of it. But the Mittals may open the door enough for the new corporate M&A teams at Indian companies to rewrite that perception.

The Mittals bid for Arcelor is important for two reasons. First, it served as a wake up call to Western markets. Historically, cross-border acquistions by Indian companies have been less than $100 million, with a few exceptions. As such, Indian companies didn’t garner much attention from Western M&A circles as many bankers and business leaders thought of Indian companies were off to the side. Mittal’s unsolicited offer for Arcelor was a wake up call for Western markets because it signaled that Indian companies now had the appetite and ability to be a major force in large M&A deals. Second, the Mittal-Arcelor situation has shown the world that Indian or Indian-led companies have now developed internal M&A teams that are sophisticated enough and have the knowledge to work through complex cross-border deals issues, such as poison pills and political maneuvering. The Mittals will open windows in the US and Western Europe just enough for bankers and companies to engage with interested Indian parties. When that happens, they will be surprised to see the progression by Indian companies to develop internal M&A teams with the requisite knowledge and sophistication to get large deals done.

– Atish Babu (atish.babu@gmail.com)