Tarun Khanna - Indian M&A deals are bite-sized

Via Mint

Jorge Paulo Lemann professor of strategy at Harvard Business School, Tarun Khanna, says some Indian firms are born ‘global’ and that their global acquisitions will gain further momentum. Khanna was in Mumbai for the launch of Going Global Initiative, an effort by industry lobby Confederation of Indian Industry to launch a support group and knowledge bank for Indian companies seeking a global presence. Khanna, who has written extensively on the rise of India and China, is creating an index of globalization that companies can use to benchmark themselves. In an interview with Mint, Khanna discussed the globalization efforts of Indian companies. Edited excerpts:

Academicians initially thought global acquisitions would happen only in IT and other such sectors. But acquisitions have come in manufacturing, metals etc. Is this a surprise?

It has been a little bit (of a) pleasant surprise. With the benefit of hindsight we can cite two reasons for it. One is that the intangible assets industries—whether it is media, software or biotechnology—have served a demonstration effect. These are the industries with a natural strength for (thriving in) the Indian economy for various reasons and having seen them succeed (globally), other companies have realized that this is not impossible.

Secondly, India is a very large economy. So, even though manufacturing and agriculture lag services quite substantially, in a large economy, you would expect some ‘outlier’ sorts of companies whether it is Bharat Forge or Mahindra and Mahindra or the Tata Group. I guess in that sense it should not have been surprising. It is just that the weight of our attention was on services. Now one hopes that the success of these manufacturing companies will trigger more aspiration from others.

Is it unusual for Indian companies to be making acquisitions abroad while the domestic market is doing as well as it is?

I think it is a mistake for all of us to focus only on the averages. There is a lot of variation. There are some companies for whom selling and sourcing talent overseas is not going to make sense in the foreseeable future.

They should focus on India as a home country. On the other side, there are companies that are entirely predicated on using India as a cheaper talent base to serve global markets.

They should be born global. Then you have the entire continuum in between. One is seeing and should expect to see the entire spectrum of experience playing out.

Even in the US, just a third of all listed companies say they have a meaningful global footprint.

You have previously said that Indian firms are better placed to manage acquisitions than Chinese companies because of their command over English and better accounting and corporate governance.

There are two or three differences between outbound M&A activity of Indian and Chinese companies. A lot more foreign outbound M&As from India are being driven by decentralized entrepreneurial action as opposed to the state-led top-down action in China. That is not to say that there are no entrepreneurial initiatives by Chinese companies. I can think of a handful, whereas in India’s case it is hard to keep track at this point, which is the good news.

Secondly, the Indian deals—with Tata-Corus and a couple of others as exceptions—are bite-sized deals as opposed to the Chinese deals. I think that is significant because my feeling is that the smaller deals built up over a longer period of time are much more of a foundation for a robust global footprint.

So, one should take this idea of big with a grain of salt and aspire to market-based, decentralized, individual company-led actions as opposed to some mandate from a ministry. So, there are some sustained differences. My own bet is on the decentralized actions, but that is just my intuition.

As Indian companies create a growing global footprint, do we have some sense of what the Indian multinational will look like?

In some ways it is going to be different but in many ways it is not going to be very different from (multinationals from) many other countries. I think we should not be arrogant. There is a hint of arrogance in the air and I think we should suspend that as quickly as possible in our own interest. We should freely copy, beg, borrow and steal from the experiences of many other countries that have gone before us and try to improve upon it. That should be our contribution.

Lots of countries have a lot to teach us and I think what they tell us is that the likely contours of an Indian MNC will still be heavily anchored in India.

I would expect that the board would primarily be Indian, if not exclusively Indian, and there are reasons for this. There has to be a glue that holds together the company.