The Grand Indian Business Strategy

So now Indian companies are on a buying spree across the world . One can see TATAs , Ambanis ,Vijay Mallyas,Videocon, Bharat Forge, Ranbaxy and even grand old PSU powerhouse BHEL contemplating outrightly buying US and European Companies. In fact TATAs have taken over roughly 30 companies in last five years. That is Great no doubt about it!

Going through the strategy adopted by Indian companies reminds me of the strategies adopted by Japanese and Korean companies about decades back .Koreans created so called chaebols – a group of family owned companies with a bank as the central company .What followed was very interesting .The risk with these chaebols is if the central bank collapses, it takes the chaebol with it and the risk materialized with many of them. Take the Japanses. They created capacities in last 90s with hope that they can utilize them and overtake US within a decade. But the capacities were never utilized and what followed was a prolonged recession.

Now lets look at the theory.

A merger/acquisition will be successful only when certain conditions are fulfilled :

• The so formed entity is better off Financially or Technologically. In case of technology , it should either suppress emergence of new technology or make a leader in a particular technology or bring down R& D costs .However all this should finally reflect in better financial performance.

• Opens up or creates retail network or increases shelf space or reduces the same for competition
• Reduces Overhead costs substantially
• Brings about consolidation in either market or suppliers or both and thereby causes expansion of margins
• Opens up a potent new market or brings up the prospect of rapid expansion in a new market

All these benefits should come at the right price for an acquisition or you carry a huge risk of carrying a debt in case you are financing the acquisition through borrowing.

Looking at Indian companies it seems that they do carry a huge debt repayment risk as most of them are financing the acquisition through borrowing. In fact acquisition has become more of a fashion nowadays . It causes so much nostalgia and xenophobia . It makes big headlines and everybody loves that .But then nothing succeeds like success and I just hope that Indian companies are not carried away by the hype. But there is no room for celebretisation and I hope they understand and imbibe the basics.