Indian companies are on an acquisition spree in the developed world, with Tata Motors buying Jaguar and Land Rover from Ford and Vedanta Resources paying $2.6bn for the assets of Asarco, a US copper miner. But are companies from India and other developing nations paying too much?
Perhaps, and for an unusual reason in the M&A world, according to a new study by academics at the University of Toronto’s Rotman School of Management. They found that companies from developing countries often top auctions of western assets because of national pride.
These companies identify buying a western target as a demonstration that they have made it in the wider world. As a result, they are willing to pay more than western corporates or financial buyers.
As the study points out, managers of western companies can overpay because they see it as a matter of personal pride – and good for their careers – to win auctions. But developing country companies tend to be driven less by personal hubris than the desire to please their fellow citizens.
The study cites an interview in the Financial Times with Ratan Tata, chairman of Tata Group after it acquired Corus:
We all felt that to lose would go beyond the group and it would be an issue of great disappointment in the country. So, on the one hand, you want to do the right thing by your shareholders and, on the other hand, you did not want to lose.
One sympathises with such sentiments but it does suggest that developing country companies are non-economic bidders in corporate auctions. That means that they are likely to keep winning and it also means that many will discover afterwards that they have over-paid.
