The United States has been the largest investing country in India in terms of foreign direct investment (FDI) approvals, actual inflows and portfolio investments for years. And now, India’s investments in the U.S. too are picking up. There were a total of 46 outbound investment deals from India to the U.S. amounting to the total value of more than $2 billion during the financial year 2006-07, according to a recent report by the Federation of Indian Chambers of Commerce and Industries (FICCI), an association of business organisations in India and Ernst & Young (E&Y), one of the largest professional services firms in the world, and one of the Big Four auditors. The amount of outbound investment doesn’t include greenfield projects, reinvested earnings & funds lent, and institutional investments.  

IT & ITeS Leads In Terms Of Number Of Deals, Mid-Cap Companies Show High Risk Appetite

Out of the total 46 outbound deals from India to the U.S. during 2006-07, 48% of the deals in terms of number of deals belonged to the Information Technology (IT) and IT-enabled Services (ITeS), says the FICCI-E&Y report. The remaining deals were quite distributed among several sectors, with Pharma & Healthcare accounting for 9% and Gems & Jewelry registering 7% deals.

In terms of value the acquisition of Lason Inc., a Canadian leading provider of document management outsourcing services by HOV Services Ltd, a global Business Process Outsourcing provider in the Transaction Management, Insurance and Tax, and Enterprise Services Industries, was of a significant value in the IT & ITeS sector. Interestingly, out of the top five deals in terms of value, three deals were executed by the Tata Group, the largest industrial conglomerate of India.

Mid-cap IT & ITeS companies have shown a much higher risk appetite setting more aggressive acquisition targets, compared with the big-5 of Indian IT who have been shying away from large acquisitions, highlights the FICCI-E&Y report. It says that the mid-tier companies (revenues of less than $300 million) need to attain scale to get invited to the same bids as the big firms. Some of them are focused on niche areas and need to build competencies in those areas. Most mid-cap companies are looking at transformational M&A as the way forward.

Overseas M&A Form the Core of Global Growth Strategy for Indian Pharma, Jewelry Companies

Overseas partnering and acquisitions have become an essential element in the strategies of all leading Indian pharma companies also, points out the study. This is attributable to their need to access global markets to successfully leverage their technical capabilities and low cost advantage. Jewelry companies too are increasingly looking at venturing into overseas retail markets, especially the U.S., mainly because of the organized nature and higher margins in the business there. Growth through acquisitions and joint ventures would be the preferred route for expansion for these companies due to the higher costs involved for setting up the operations.

India’s Global Outbound Deals 43% Higher Than Inbound Deals In January-April 2007

As we had mentioned earlier in our issue dated 16^th January 2007, 2006 was the first year when the total value of outbound deals (Indian companies acquiring overseas companies) surpassed the figure of inbound deals (overseas companies acquiring companies in India). In 2005, the total value of outbound deals was $4 billion compared to the inbound deals worth $5 billion. In 2006, the equation changed heavily in favour of outbound deals that went up 130% to $10 billion compared to the inbound deals that were almost stagnant at $5 billion. 

The trend is continuing this year too, as the total outbound cross border deals during January-April 2007 was 72 with a value of $24.4 billion, 43.5% higher than the total inbound deal value of $17 billion of 38 deals, as per a recent report by accountancy firm Grant Thornton India.

High Profits and Better Capacity to Borrow

The Indian firms now have access to significantly more capital than in the past, as they are becoming more profitable and also because many of them being underleveraged, have better capacity to borrow. Also, the Indian multinational companies have the cost edge, which is the key driving factor that helps ensure value for dollar for the global consumer, says the FICCI-E&Y report. The risk appetite of the Indian companies has also increased, as the astute managers are realizing the benefits that taking on additional and calculated risk can bring. Indian companies are high on organic growth and are increasingly going global because home markets do not have the scale or the resources to allow them to deliver the levels of shareholder value and competitive advantage they aspire to achieve.

Regulatory changes in India have also made it easier for the Indian firms to acquire companies overseas, points out the report. The government, particularly the Reserve Bank of India (RBI), has played an accommodative role in this strategy of ‘internationalization’ of the Indian corporate sector. As foreign exchange reserves have grown, the RBI has progressively relaxed the controls on outbound investments making it easier for Indian companies to acquire or invest abroad. A slew of amendments to the RBI guidelines have effectively raised permissible investment limits and streamlined processes.