The ambition from Indian mid-sized companies for large debt-fuelled acquisitions abroad was dealt a major setback after the unravelling of a $2.5 billion bid by India's Apollo Tyres Ltd to buy Cooper Tire & Rubber Co.
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While some bankers said Apollo's bid for Cooper was risky due to the larger size of the target, the outcome will add to scepticism about the ability of Indian family-run firms to execute large cross-border deals despite their need to search for growth abroad.
Apollo's bid for Cooper, hoping to transform itself into the world's seventh-largest tyre maker, was surprising given that the Indian company was a third of the size of its U.S. target. Apollo relied on a hefty debt package for its ambitious attempt.
"It's like a casino game for some of the Indian company founders who dream of getting into the big league by finance-backed acquisitions, but the devil is in execution and very few of them are good at that," said Rishi Sahai, managing director at Cogence Advisors, a boutique India investment bank.
"Every investment banker would now be cautious in showing a billion-dollar-plus target to mid-sized Indian companies and question their ability to get the required financing and close the deal, while their Chinese counterparts come all prepared."
India Inc's overseas ambitions rose along with China's roughly 10 years ago as the two countries courted growth outside their own economies.
Corporate India has won some successful overseas deals, including Tata Motors' acquisition of Jaguar Land Rover from Ford Motor in 2008 for $2.3 billion.
But for the most part, India has struggled to show that its companies are equipped with the savvy, the experience and the determination needed to win cross-border deals and to manage them well.
India Inc has launched $117 billion worth of outbound M&A in the past decade, but that pales in comparison to China's $390 billion worth of outbound deals announced in the same period, according to Thomson Reuters data.
Unlike China, where state-owned enterprises have dominated deal flows, in India the private sector companies, especially small and medium-sized ones, have been at the forefront of deal making with deals often fuelled by large amounts of debt.
GVK Power & Infrastructure in 2011 agreed to pay $1.26 billion for a majority stake in three Australian coal mines and a port and rail project owned by Hancock Group, but has seen the debt denting its balance sheet and its shares.
Other mid-sized family-owned Indian enterprises, such as GMR Infrastructure, are also reeling under the impact of the debt they took on to acquire overseas assets in the last couple of years.
"There wasn't a gung-ho attitude toward outbound M&A anyway in the last couple of years in India and the Apollo-Cooper episode will further slow down the process," said the head of M&A at a European bank in Mumbai.
"Indian companies ... especially the mid-sized names, would be a lot more cautious about the kind of assets they buy, the kind of leverage they take."
Apollo's offer to acquire Cooper faced obstacles from the start.
At the heart of the dispute has been Apollo's failure to reach contract agreements with Cooper's U.S. labour union. At the same time, Cooper's partner in China opposed the merger, filing a lawsuit to dissolve their joint venture.
Apollo has said these two developments were not expected at the time of the deal, but Cooper maintains the issues were a result of the merger and says Apollo was aware of the risks.
According to people familiar with the matter, investment bankers had pitched acquisition ideas to Apollo for years. With annual sales of about $2 billion and a market value of roughly $700 million, the practice was restricted to targets worth less than $500 million.
Apollo declined to comment on Tuesday.
One banker involved in the deal said he was shocked when Apollo's managing director, Neeraj Kanwar, whose family owns 43 percent of Apollo, showed interest in Cooper.
"In a pitching process, people show all kind of things to a possible buyer, but few thought of showing Cooper to Apollo," the banker said, declining to be named as he was not authorised to speak to the media.
All the bankers Reuters spoke to for this article declined to be named.
Now that the deal has unravelled, questions are being asked whether cheap financing and over-exuberance took precedent over a deeper scrutiny of Cooper, raising worries that it will make other Indian acquirers gun shy.
"People, including perhaps Apollo, will continue to look at deals, but the outbound deals worth more than $500 million will be very, very selective. Indian companies will have a lot of homework to do before they get back into the aggressive mode," said the investment banking head at a foreign bank in Mumbai. (