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Small buyouts bring big gains for India Inc

Kausik Datta  |  Mumbai 

'String of pearls' deals account for nearly 80% M&As.
Jain Irrigation Systems bought a 50 per cent stake in Israel's NaanDan Irrigation Systems a fortnight ago. The total acquisition cost, including a future investment of Rs 42 crore, was only Rs 87 crore. But it will help Jain Irrigation emerge as the world's largest drip irrigation company in two years.
The Jalgaon-based company (net sales Rs 1,208 crore) has been buying what investment bankers describe as a "string of pearls" for the past year. Before the Israeli acquisition, it scooped up three US-based firms "" Chapin Watermatics Inc, Cascade Specialties Inc and Aquarius Brands Inc.
United Phosphorus' is another example of the "string of pearls" strategy where the acquirer buys small unlisted, family-owned businesses which are not on the radar of global giants and financial investors.
The Vapi-based firm invested Rs 1,000 crore last year to buy five brands and one foreign company, Cerexagri. In the process, the Rs 1,351 crore firm became the 11th largest agri-company in the global pecking order from its previous ranking of 17.
Last year, Wipro spent over Rs 800 crore on six European and US companies, including Austria's R&D services boutique NewLogic, New Jersey's payment processor mPower, and Michigan's mechanical design services firm Quantech.Wipro Chairman Premji's string of pearls strategy of acquiring niche boutique firms is helping the company expand its global footprint.
These deals may lack the appeal of the big ones such as Tata Steel's purchase of Corus or Dr Reddy's acquisition of Betapharm, where the target's size is much bigger than the acquirer's.
But they have often made a much bigger statement than their actual size. For instance, Standard & Poor's recently named Jain Irrigation in its global list of 300 mid-sized most likely to challenge world's leading
And the trend is growing. In 2006, there were 782 deals in the M&A space, a sharp increase from the 145 deals signed in the previous year. Investment bankers say almost 80 per cent of the deals are instances of the string of pearls strategy.
Why do target smaller foreign ones? Vikas Dawra, senior director of investment banking of Yes Bank, says: "The purpose of this strategy is to gain technological support, entry to an otherwise difficult market, opportunities to move up the value chain, and even to acquire better management personnel."
What do Indian companies do with these acquisitions? "We will consolidate and integrate in the next few quarters, focus on the Indian market and grow our production capacity organically," Anil Jain, managing director, Jain Irrigation, told Business Standard after the Israeli acquisition.
United Phosphorus CFO Rajendra Darak said the strategy served a larger purpose for the economy. "The prospective economic boom is better captured in the growing trend of small acquisitions by Indian companies," he added.
An acquirer actually promises to scale up his domestic operations when he goes in for a small overseas acquisition, just to get a foothold in that particular market.
"His intention is to service the foreign market from India, so that he can enjoy the low production cost advantage in India. So, the increasing number of small deals actually emphasise India Inc's confidence in itself," he added.
Is the strategy paying dividends? Another banker, whose bank was associated with many such deals, says they do. "Most of the target companies are family-run and closely held, which makes for integration post acquisition. So far, it is working quite well," he added.

First Published: Sat, June 09 2007. 00:00 IST