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Business Commentary/Dilip Thakore

The painful M&A fever will improve Corporate India's health

Somewhat belatedly, the mergers and acquisitions wave has washed up on Indian shores. The M&A mania has radically transformed the economies of the developed -- especially the United States. With the Monopolies and Restrictive Trade Practices Act having been amended to limit the jurisdiction of the Monopolies Commission to restrictive practices, large companies are swallowing up smaller ones and corporates are entering into business alliances which would have been unthinkable a few years ago.

Within the last fortnight, HDFC Bank merged with TimesBank to become the largest new private sector bank in the country with a deposit base of Rs 69 billion in 107 branches. Satyam Infoway took over 'Internet portal' IndiaWorld for a record sum of Rs 4.99 billion payable in cash.

The week before that, Dr Reddy's Laboratories bought a 45 per cent stake in an American pharma company and India Cements took over Shri Vishnu Cements following its takeover earlier this year of Raasi Cements. Earlier, Hindustan Lever bought over Tomco and Lakme and Nicholas Piramal acquired a controlling interest in Boheringer-Knoll.

These are examples of the M&A activity which is transforming Indian business and industry.

The popular reaction to the M&A fever is one of dazed confusion. Inevitably, the reaction of Left politicians and intellectuals is hostile. For them, the M&A fever is one more proof of the evils of economic liberalisation. Deregulation, they believe, is wiping out small and medium scale industry by giving free rein to big, bad capitalists.

Unfortunately, so deeply entrenched are learning-proof Lefties within academia and the media that they have caused a stir within other segments of the population. It is necessary to put the M&A phenomenon in perspective.

At bottom, it is a beneficial fever because it is a market-led corrective to distortions created by decades of licence-raj and Indian-style socialism. The licence raj was marked by the fear that capitalists would become too powerful if they are given economic freedom. So, small and intrinsically unviable business units and companies were licensed by successive governments in New Delhi.

To make these units viable, they were overprotected from foreign and domestic competition by way of high tariff barriers (custom duties) and artificial shortages. The only segment of the economy in which large plants with viable capacities were permitted to mushroom was the public sector. But, unfortunately, public sector enterprises have proved to be a chronically loss-making millstone around the neck of the Indian economy.

In the circumstances, the spate of M&A activity within Indian industry represents an overdue restructuring. The consequence of this seemingly frenzied buying, selling and takeover fever is likely to be the emergence of strong, economic-sized business enterprises capable of competing in the emerging global economy.

This global economy has been mandated by the 134-nation World Trade Organisation. Quantitative restrictions and blanket bans on imports are in the process of being outlawed by the WTO. Tariff barriers are likely to be slashed to single digit figures. So Indian industry has to restructure and knock itself into shape for a new and unprecedented era of competition in the emerging global marketplace of the new millennium.

Fortunately, this time round, Indian industry was represented in the Indian delegation to the WTO talks at Seattle. Hitherto, it was excluded from the GATT and Dunkel Round negotiations that regulated international trade and tariffs. This will hopefully sensitise industry captains and the government to the new reality that the era of free lunches and free-flowing aid is over.

Pain is inevitable in the restructuring of business organisations to make them combat-ready in the new age. But this pain could be offset by gains that will flow to shareholders and consumers as Indian industry begins to produce competitively priced quality goods and services for the global market.

Dilip Thakore

Business