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Buying western companies as a matter of pride
June 3, 2008
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.
To say that developing country companies are “non-economic bidders” in corporate auctions is taking this argument a bit too far
One of the reasons that bidders from India, China etc are able to bid higher is because they think that in the long run, they can leverage on low cost manufacturing/service base back home
Such synergestic assumptions are usually built into valuation models, which lets these companies offer more while bidding for assets in the west
Posted by: Jay | June 3rd, 2008 at 8:04 am | Report this commentIn buying Jaguar & and Rover, Tata has bought not just auto companies but two world-class brand names. How much are the latter worth, that is the question. Probably a lot more than they were as a part of Ford. Already I see more ads in the media for Tata’s new acquisitions and - it’s noticeable that there seem to be more Jags on the road in CH. Perhaps they appeal to both Swiss-Germans AND to Romands (French-Swiss) as an alternative to German autos (which S-Gs buy) and French autos (which the Romands buy)?
Posted by: J.J. | June 3rd, 2008 at 9:11 am | Report this commentEmpires rise and empires fall, it is not long ago that we have seen the Aston Martin moving away from Ford to a consortium of Kuwait Investment firms, which, as news has, is in turn planning to sell its shares after this year after they make a 100% return on investment this year. It was the turn of Tatas this time with Jaguar. Having tasted a great success with Corus on a large treaty count and as a firm which has good understanding of Global automobile market with couple of their vehicles launched earlier in the UK (and other European locations) which have not gained due significance though, their Jaguar and Land Rover shouldn’t be a surprise at all for the close watchers. With the global economy stabilising and many countries like India and China maturing to meet global demands there is a lot more to be seen on the new M&A trends. Yes, there will be few unrealistic pacts but I am certain they would only sound so for a short while as the statistics have it the market expansion opportunities within any of those growing economies are endless
Posted by: Manjunath DVS | June 3rd, 2008 at 8:33 pm | Report this commentI do agree with the writer to an extent, but having said that the business of a business is business and I am sure that the top bosses at India Inc are men of discernment.
Business sense is more important than jingoistic sentiments.
Posted by: Bhaskar | June 4th, 2008 at 10:08 am | Report this commentI think Indian companies already have significant operations and even if buying western companies means paying a ittle bit more, its not all that bad. The synergistic effects are well worth it.
Posted by: Mulith | August 26th, 2008 at 2:47 pm | Report this comment