Saturday, December 29, 2007

Smaller local deals - way to go in 2008

I am not surprised after reading this. Going by the frenetic acquisitions in the Indian pharmaceuticals space, buyout fatigue is but natural. The strain on the resources of the acquirer post event is phenomenal. The integration of two distant, culturally disparate organizations taxes even the most competent management. You’ve miles to go before the intended benefits of the acquisition – global footprint, larger scale and added market share etc., are realized. Some estimates put the success rate of M&A deals during the last 5 years as low as just 18% globally.

But I think it’s far easier to integrate businesses in the same geographies. You can safely discount the cultural diversity element that rocks many deals. They are relatively inexpensive and you can trust your judgments since you’ve been active in the same realm. You can easily upsell your existing products. It’s a win-win and a surer and safer bet than a big ticket, overseas acquisition, where any one of the brands could suffer a dent depending upon the perceptions that surround the deal. If there is one sure winner in a big ticket deal, it’s the I-bankers and the advisers to the deal. The buyer rarely wins in overseas buyouts.

But the record is so much better in strategies that advocate acquiring local brands and strategic domestic investments. I see that trend in Indian Pharma space now - changing their tactics to concentrate on brand acquisitions and strategic investments rather than risky big ticket cross-border acquisitions. Some of my friends in I-banking circles tell me it’s the best time to buy businesses in the US since Rupee is on a record high against the dollar. But I don’t buy that line. You should buy a business only if it’s a sure value add in the long term, because it’s a one-off, game changing stuff. Not just because you have a favorable exchange rate, as matters to the import of raw material / capital goods.

But then my friends are I-Bankers and it suits them well to take that line. They have to get by :)

No comments: