Foreign Takeover Troubles?
A recent article in the Economist took a look at Indian cross-border takeovers (see Running with the Bulls) and analyzed four recent large deals. The question posed: Do these takeovers generate value for the purchaser?
To answer this question the Economist looked at two indicators of ex post deal value: (1) gross operating profits (EBITDA) and (2) return on capital (ROC).
The Economist concludes that Tata’s Jaguar Land Rover (JLR) acquisition is the only one, so far, that clearly generates value.
There has been one triumph; JLR, where earnings have soared despite a near-death experience after the 2008 crash…Under Tata’s ownership JLR has also launched a killer product, the Range Rover Evoque, and cracked emerging markets, not least China.
I’ve written about the JLR deal in the past (see Tata and JLR I, Tata and JLR II, Tata and JLR III, Tata and JLR IIII) and have not been as positive about the JLR deal as the Economist, but the numbers are certainly impressive. As the Economist duly notes:
A chunk of the recovery [in JLR] is due to the fall of the pound: JLR’s plants are mainly in Britain, though it sells largely in other countries.
Even the success of the Evoque cannot be wholly attributed to Tata. It was developed while Ford was JLR’s parent. Time will tell if this deal ultimately delivers satisfactory returns, in the meantime, I remain somewhat of a skeptic.
More generally, the Economist recognizes that most of India’s cross-border deals have, thus far, underperformed:
…with hindsight claims that India Inc was taking over the world look daft…Yet many deals were creatures of the boom, involving Indian firms with relatively modest cash flows and fiddly structures buying large targets often with money borrowed cheaply from frothy capital markets…To succeed it is not enough to run the acquired firm well. It must also be bought for a sane price.
This is more consistent with what I have written in the past (see India Buys Global):
In addition to the typical motivations for foreign expansion including market access and/or access to basic resources, firms from emerging markets often expand in an effort to tap into, and assimilate, state of the art technologies available in developed markets…[But] effectively integrating advanced technological knowledge is challenging. Closing the skills gap with advanced countries is no easy task (see Technological Ascendancy). Not only that, but in many of these deals, emerging market firms often overpay for the assets of struggling developed market firms…
The lesson here is that foreign acquisitions are difficult to pull off. As with domestic deals, they fail to deliver adequate returns more often than not (see Why M&A Deals Go Bad). A lot depends on price and fit. And though I may ultimately be wrong about the Tata JLR deal, Indian firms have not yet demonstrated that their acquisitive performance is an exception to the norm.