Wealth destroyed Mergers and acquisitions

To achieve scales, companies have to step outside and expand. These days a lot of Indian and global companies acquired and merged with other firms to expand their business. However, doing so may not necessarily add to shareholder wealth. India Inc has hardly been able to create value for its shareholders through its inorganic expansion abroad. Most of India’s big-ticket overseas acquisitions in the past five to seven years have corroded wealth. The reason for this range from high leverage taken to acquire a company, adverse changes in business cycle or failure to turn around a loss making unit. Here are some of the mergers and acquisitions that have destroyed wealth.

Tata Steel acquired Corus 4 times its size for $12.04 Billion in 2006. The valuation was more than one and a half times its initial offer and was paid monthly through debt. This European business for Tata was loss making until FY13 and has not shown strong signs of a turn around. Hindalco acquired Canadian company Novelis for $6 Billion in 2007 but the slowdown in Aluminum demand have led to the company stock stagnation at the same level. United Spirits had acquired UK based White & Mackay, in 2007 for close to 540 Million pounds. Diageo, in turn acquired USL, in 2012, which had to sell White & Mackay in 2014. Since then Stocks has fallen 18 percent.

In the past five years, India’s largest hospitality company Indian hotels consolidated operations have been impacted due to loss making international operations. For instance, Taj Boston losses have grown to Rs 523 crore from Rs 122 crore in past five years ending FY14. Tata chemicals $1 Billion acquisition of General Chemicals in 2008 has not really brought much cheer to its shareholders. Company market capitalization has not changed much since 2008. Suzlon, the world’s fifth largest wind turbine maker, continued to face challenging times after the debt funded acquisition of Senvion in 2007. Its debt serving ability hit a wall after global demand environment collapsed due to financial crisis.

Between 2010 and 2013, Fortis healthcare expanded inorganically, venturing into regions like Australia, New Zealand, Hong Kong, Vietnam, Singapore, and Canada. The acquisitions strained its finances and increased interest cost on the debt pile. Shifting focus from international market to the domestic market has helped the company return to black. These are some of the Indian companies whose wealth was destroyed after the acquisitions. However, in Software Industry, much of the wealth is not destroyed after the acquisition.