Trying to acquire and run a business in India can break even the strongest of multinational backs. Ask Royal Dutch/Shell, which spent three years faltering at the first step.
The European oil giant announced with some fanfare in 1998 that it was buying a 49 percent stake in the petrochemicals arm of National Organic Chemical Industries Ltd, a one-time blue chip. Analysts saw it as the first step toward a takeover. But three years passed as Shell waited for regulatory approval, and after a global business restructure last year it decided to pull the plug on the deal in June of this year.
Multinational corporations (MNCs) used to have dollar signs in their eyes when they spoke of India, envisioning a seemingly insatiable demand in the world's second-most populous country.
But disenchantment has set in. The share of MNCs in India's merger and acquisitions (M&A) market has fallen steadily from 57 percent by value of all deals in 1999 to 39 percent in the first half of this year, according to consultancy Indian Advisory Partners.
The nervousness about doing business in south Asia after the September attacks on the US is only the latest blow.
"The dream days seem to be over for now," says Rajeev Gupta, head of M&A at leading investment bank DSP Merrill Lynch.
"M&A drives foreign direct investment (FDI), and the lower interest in buying into Indian companies will hit the government's FDI targets," he said.
The government has an annual FDI target of US$10 billion. The M&A market saw deals worth US$9.3 billion last year and US$3.6 billion in the first half of this year, according to India Advisory Partners.
Over the last three years, the prominent deals involving MNCs in India were sell-offs -- power majors Cogentrix, Tractebel, Electricite de France and Daewoo Power are gone, after a brief, unsuccessful battle with red tape.
Houston-based Enron Corp, which built a US$2.9 billion power plant, is hawking it to local buyers after a payment imbroglio with a local utility and financial difficulties at home.
The government's privatisation programme has also drawn little international interest, with Singapore Airlines pulling out of a high profile bid for national carrier Air-India in August, citing political opposition.
But red tape is just one of the problems MNCs face in doing business in India.
"The Indian market is characterised by excessive regulation, inadequate legal protection for private investors and poor quality infrastructure and public services," says Neil Gregory, Head of Strategy, South Asia, at the International Finance Corp in Washington.
Between 1991 and 1998, India converted less than a quarter of all approved projects into FDI inflows. Some buyers don't even get to ask for government approval as negotiations stall because of the high expectations of sellers.
"Sellers here feel they have worked to build the business over a lifetime and want huge compensation for selling the family jewels," said TV Raghunath, head of M&A at Kotak Mahindra Capital Co.
"Several deals have been lost just because the sellers wanted a few dollars more," he adds.
Deals could be driven by sellers getting more realistic in a market dominated by family-run companies, says Lazard India managing director Amit Mukherjee.
"At a time when critical size is important, growing a company to 3 billion rupees (US$62.5 million) turnover from 2 billion is all very well, but to get to 10 billion is beyond many family-run companies... it requires a change in mindset," he says -- but giving up control is a stumbling block for many.
Global Cement majors Holcim, Lafarge and Cemex have been stuck in talks to acquire a stake in India's largest cement maker, Larsen & Toubro, for the past year.
Newspaper reports suggest the deal has run aground on L&T's insistence that it hold key management jobs.
"Indian founders are good businessmen and tough negotiators, and that's a pretty lethal combination," says Ashok Wadhwa, chairman of Ambit Corporate Finance.
"Deals don't get done on time."
MNCs are also hamstrung by being unable to make a hostile bid: Indian law stipulates the target company's board must approve the bid and then ask for government approval. There are also issues related to financial discipline.
"Due diligence reveals a surprising number of skeletons in the cupboards of even large companies, including the effects of accounting jugglery, as financial controls have not been strong enough in India," says Ketan Dalal, director at Ambit.
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