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India Inc on a buying binge in US

The Hindu Business Line:  July, 2010

Robust market, natural resources creates value buying opportunities: Report.

Mumbai: Indian companies are on an acquisition spree in the US. In the first half of the current calendar year, they acquired 23 companies with a cumulative transaction value of over $3.8 billion, according to a report by New York-based advisory firm IMaCS Virtus Global Partners.

This is double the deal volume and eight times the deal value compared with the same period in 2009.

Robust economic growth and a surge in demand for natural resources in India combined with high debt-to-equity ratio and lower earnings potential of US companies is creating value buying opportunities for Indian companies in the US, said the firm, which is a joint venture between ICRA Management Consulting Services (IMaCS) and Virtus Global Partners.

Information technology/ Information Technology Enabled Services industry leads the pack, accounting for over 65 per cent share (15 in absolute terms) of the total US bound transactions by volume, followed by oil and gas and mining (9 per cent each). Other industries such as pharmaceutical, finance, media accounted for less than 5 per cent each in terms of volume.

Within the IT space, healthcare-related IT, remote infrastructure management, specialised business process solutions, and enterprise resource planning sub-segments were attractive for acquisitions, given their untapped offshore opportunities and relatively higher margins.

Strengthening capabilities

Mid-sized companies such as Prithvi Info Solutions (acquired Percentix Inc), Integra Software Solutions (Silver Editions Inc), Educomp (StudyPlaces Inc), Cambridge Technologies (Vox Holdings Inc) and Avantha Group (Pyramid Healthcare) sought to add new service capabilities through US bound acquisitions in the reporting period.

Large sized companies such as Aegis (acquired Sallie Mae's customer service centre), MphasiS (Fortify Infrastructure), Aditya Birla Minacs (Bureau of Collection Recovery), Rolta India (OneGIS Inc), and Glodyne Technoserve (DecisionOne Inc) sought to strengthen their current capabilities.

One of the key aspects of this year's transactions was the focus on natural resources such as Reliance Industries' acquisition of stake in shale gas assets of Atlas Energy and Pioneer Natural Resources for over $2.8 billion and Essar Group's acquisition of Trinity Coal for $600 million.

Compared to the small-size and distress related transactions of last year, this year's transaction sizes were significantly larger and growth- focused. Six acquisitions in the first half of 2010 were over $100 million in size compared to none in H12009.

A majority of the transactions in the reporting half year had an earn-out structure where a portion of the deal value is paid on future milestones. This is evident in Reliance Industries' acquisition and MphasiS' Fortify buy.

Developed economies such as the US are attractive for Indian companies because of their natural resources, large consumer markets, transparent business processes, robust legal environment, advanced technologies, skills and knowledge capital, said the firm.

Moreover, as the developed economies tend to be mature and saturated, it often proves difficult for Indian companies to gain market share without acquisitions.