India Goes Global—How Cross-border Acquisitions are Powering Growth

Indian companies are expanding beyond outsourcing and investment hubs to become global market-shapers through mergers and acquisitions. India Goes Global explores this growing trend, identifying the drivers behind this expansion and highlighting critical success factors.

In recent years most media references to India's growth have focused on outsourcing and investment, but now the subcontinent is seen as a force that shapes global markets.

Despite fears that India would be overrun by foreign multinationals, Indian companies have not only managed to fight off competitors on their home ground, they also have taken the commercial battle abroad.

The increase in major cross-border transactions in recent years has been facilitated by the relaxation of regulations on overseas capital movements as well as a supportive political and economic environment.

Indian companies are able to identify foreign firms that have value-added offerings that complement their own low-cost products and services to create an efficient integrated global business model—turning the conventional direction of such deals on its head. In this way, they can more closely replicate the model of Western multinationals involving a mix of high-value and low-cost capabilities distributed across different geographic locations.

• Indian companies see "going global" as a strategic priority and M&A is increasingly seen as an attractive way to achieve this.
  
  • Ninety-five percent of Indian respondents highlighted the importance of going global, with 62 percent seeing this as an overriding objective driving strategy.
    
    
  • The number of cross-border deals has increased steadily: from 30 in 1995 to 71 in 2000, and is expected to be 183 in 2006.
    
    
  • About three-quarters of acquisitions conducted by Indian companies since 2003 have been cross-border.
    
    

• Acquisitions are spread across geographies, but are clearly focused on developed markets.
  
  • From 1995 to August 2006, 29 percent of Indian cross-border M&As occurred in the European Union and 32 percent in North America.
    
    
  • Less developed economies are attractive due to low acquisition costs and favourable terms due to a high demand for foreign direct investment (FDI).
    
    

• Acquisition targets have diversified to cover a wide range of industries.
  
  • Pre-2000, key M&A target industries included consumer goods and services, energy, pharmaceuticals and health care.
    
    
  • Post-2000, industries as diverse as forest products, human resources and market research have been targeted.

We identifyfour key drivers for Indian companies considering overseas acquisitions:

• The need to capture new markets: Some 81 percent of participants in the Accenture study said the key motivation for going global was to find new markets to sustain top-line growth.
  
  
• The need to expand capabilities and assets: Many Indian companies are seeking to expand their distinctive capabilities by acquiring specific skills, knowledge and technology abroad, which are either unavailable or of inadequate quality in India.
  
  
• The need to expand product or service portfolios: Accenture's analysis reveals that most Indian companies are endeavoring to increase market share by building the size of their product and service portfolios.
  
  
• The pressure of domestic competition: Domestic competition is pushing some Indian companies into less competitive overseas markets, thereby spreading their risk across geographies.

The next chapter: The increasing scale and geographic scope of investment by Indian companies is predicted to be a catalyst for wider industry and economic change. The increase in cross-border M&A will lead to consolidation of key industries, intensification of competition in many industries as Indian companies apply their low-cost business models in Western markets, and greater interdependence between economies as investment flows become more complex and multidirectional.

Accenture analysis of the opportunities and challenges of India's global expansion identifies fourimperatives for Indian businesses looking to acquire companies abroad:

• Flexible organization structures are essential: Successful integration requires a flexible and fluid approach by management to ensure the ability to adapt to cultural, social and other factors that vary across markets. Eighty-three percent of Indian business leaders identified the development of flexible organizational structures as the most critical capability for the success of globalization strategies.
  
  
• Due diligence must be comprehensive: The due diligence needs to cover unknown market landscapes as well as additional factors like governance and legislative and regulatory rules and processes. Seventy-seven percent of respondents identified "complying with regulations in overseas markets" as a critical capability for globalization.
  
  
• Location decisions need a strategic approach: A wide range of country-specific factors must be incorporated into this decision-making process. "Coping with country risks in overseas markets" was selected as a critical capability for success by 76 percent of respondents.
  
  
• Strong communication is fundamental to success: A successful integration process relies on effective, consistent and regular communication from company leaders to all constituencies, including customers, employers, regulators, suppliers, shareholders, competitors and partners.