New frontiers, new thinking

5 May 2007
Kumar Mangalam Birla
Chairman, Aditya Birla Group
Outlook Business

India today is in the mainstream of global consciousness. There is a new-found sense of self-assuredness. The entrepreneurship and dynamism its corporate houses have shown over the last five years have been and continue to be quite remarkable.

India has morphed well in the socio-economic dimensions and it boasts of a robust economic growth rate. Its demographic advantage is universally recognised. The rich-poor divide is narrowing.

Many Indian companies are now globally benchmarkable. So there is every reason for us to be on a high. Small wonder then that India commands a new-found respect in the global arena.

The acquisitive appetite that companies have displayed signals the emergence of a new India. Until recently global multinationals had been planting their flags here. Now, the scenario is changing as increasingly domestic business houses have begun acquiring companies overseas. This has secured a niche for Indian business in the global economy and I believe it can only keep growing in significance. I believe the value of Indian cross-border deals between January and October 2006 is estimated at $23 billion, compared to $7.8 billion during the corresponding period of 2005 — almost a two-fold rise.

The average deal size also grew, from $32 million in 2005 to $47 million in the first half of 2006. A Grant Thornton India survey has very significant pointers. Of the 200 companies surveyed by it, 162 (that is nearly 81 per cent) said they were exploring the M&A option to grow. Of these 162, only 60 had actually undertaken the M&A route in the past. This clearly signals intense M&A activity going forward.

Tata Steel, Infosys, Tata Consultancy Services, Wipro, Bharat Forge, Ranbaxy and, of course, we, at the Aditya Birla Group, have bought companies overseas or set up service organisations.

Undoubtedly, Indian companies are going to become much more global in the coming years. They seem all set to sign increasingly bigger deals, in India and overseas. More important, the deals will happen across a broader spectrum of industries and in more dispersed geographies. Significantly, the profile of players will also change — it won't be just the larger companies involved in M&As, but mid-size and small companies as well.

Reforms perform
The spurt in India's M&A is the outcome of a number of converging factors. We have been fortunate to have had a political system that backed the bold initiatives integral to change and reform. Successive governments have been equally committed to the continuity and consistency of reform policy. The government has made financing easier over the past few years so that Indian companies have the resources for acquisitions. The reforms to capital markets such as funding foreign direct investment through the external commercial borrowing route, and the removal of regulatory limits to debt that companies can raise, have facilitated bold acquisitions across sectors. Second, the far higher valuations of Indian stocks compared to the stocks of overseas companies — together with a stronger rupee — give Indian entrepreneurs a strong 'currency' to carry out acquisitions, even as acquisitions often are funded by cash and debt through off-shore special purpose vehicles.

A larger global presence entails potentially huge benefits. Global market access, state-of-the-art technology, scale and size then become a given. Take, for instance, our proposed acquisition of Novelis. While a landmark deal for Hindalco and our group, it is in line with our long-term strategy of expanding the global presence across various businesses and is consistent with our vision of "Taking India to the World." This will establish a global, integrated aluminium producer with low-cost alumina and aluminium production facilities melded with high-end aluminium rolled product capabilities. The Novelis deal will give us immediate scale and a global footprint. We were attracted to Novelis by its sheer size, scale, and cutting-edge technology, which would have taken us over five years to build — a luxury we can ill-afford. In aluminium, one needs to invest in downstream to go up the value chain. India does not offer suitable downstream investment opportunities of a global scale.

Indian multinationals

While the age of the Indian multinational is here, we in India Inc. have a long way to go. We have to work constantly to open our organisation's windows to the winds of new ideas and a multi-ethnic workforce. It is relatively simpler to address cross-border issues pertaining to technology, finance, markets and products but extremely difficult to cope with challenges relating to the human dimension. Being a true-blue multinational is only partly about geographic spread. It is more about a mindset that wants to leverage resources seamlessly, across geographic boundaries. It is a mindset that is eager to build unique capabilities to transcend the barriers of language and cultures to c;reate value. It's about being global in attitudes without letting go of your roots.

A major challenge relates to establishing brand equity. I believe Indian companies will take some time to move up the ladder of brand recognition. I say this based on our experience, where in some countries our group has a high brand equity. In the 1960s, when my father, fettered by the Licence Raj, looked beyond the Indian shores, it was truly a visionary act. We take great pride in the fact of our group being the first truly Indian MNC, having established major companies in the South East Asia. But in this region, it has taken us years of sustained performance — following best employment practices and being a good corporate citizen — to earn brand recognition.

Let me give you an example of how we built our brand in Canada. We acquired a pulp mill that had been closed. We had to convince diverse constituencies, ranging from the union to the provincial government and politicians. This took long, but our candour, sincerity and commitment paid off. Today, many employees in the mill feel that they are better off as part of an Indian MNC rather than with a local company that presided over its closure.

As I look ahead, I believe the war for talent will intensify and that could become a major speed-breaker. There is acute competition, rather, a scramble for inducting and retaining people with the competencies apposite for a globalising corporation. When a company goes global, its internal demography transforms into a socio-cultural potpourri. There is an inherent instability. Corporations that embark on this growth trajectory will face churn and uncertainty amidst change. On such a journey, success will come to those corporations in which the leadership is alchemical and values-driven.